Bank of England Holds Interest Rates at 3.75% as Inflation Expected to Rise Again

The Bank of England has decided to keep UK interest rates unchanged at 3.75%, as policymakers continue to assess the impact of volatile energy prices and ongoing uncertainty in the global economy.

The decision means the Bank Rate has now remained unchanged for a fifth consecutive meeting. However, the vote was not unanimous, with three members of the Monetary Policy Committee voting for an increase to 4%, while six supported keeping rates at their current level.

The Bank's decision comes despite a recent fall in UK inflation. The inflation rate dropped to 2.6% in the year to June, moving closer to the Bank of England's 2% target.

However, policymakers warned that inflation could rise again later this year, largely because of continued uncertainty surrounding energy prices.

Bank of England Governor Andrew Bailey said that while inflation had fallen more quickly than expected, the ongoing conflict in the Middle East was contributing to "high and volatile energy prices". The Bank expects this to push inflation higher again during 2026.

The Bank said its priority would be to ensure that any renewed increase in inflation is temporary and that inflation eventually returns sustainably to its 2% target.

Energy prices remain a major concern

The Bank of England has been closely monitoring movements in global oil and gas prices. Uncertainty surrounding the conflict in the Middle East has contributed to significant fluctuations in energy markets, with changes in fuel and energy costs having a direct impact on households and businesses.

Higher energy prices could increase household bills and raise costs for companies, potentially leading some businesses to increase their prices.

The Bank also highlighted wider economic pressures, including higher borrowing costs and a labour market where more people are looking for work than there are available jobs.

The Bank believes weaker pressure on wages could help limit some of the wider inflationary effects of higher energy costs.

Three members wanted rates to rise

Although the Bank decided against increasing interest rates, three of the nine members of the Monetary Policy Committee voted in favour of raising the Bank Rate to 4%.

The change in voting patterns highlights the uncertainty facing policymakers. At the previous meeting, the committee had voted 7-2 in favour of keeping rates unchanged. The latest decision resulted in a 6-3 vote.

The Bank has examined several possible economic scenarios linked to developments in the Middle East. In a more severe scenario involving oil prices reaching around $100 a barrel, inflation could reach approximately 3.2% during 2026.

In another scenario, where oil prices rise to around $76 a barrel before falling back towards $71, inflation could reach around 3%.

Both scenarios would leave inflation above the Bank's 2% target.

What does this mean for households?

The Bank Rate influences the interest rates charged by lenders, affecting mortgages, loans and other forms of borrowing, as well as the returns available to savers.

For homeowners approaching the end of a fixed-rate mortgage deal, today's decision does not necessarily mean borrowing costs will remain unchanged.

Mortgage rates have continued to move in recent weeks, with some lenders increasing the rates available on new fixed-rate deals despite the Bank Rate remaining at 3.75%.

Borrowers and prospective homeowners are therefore facing an uncertain outlook, with the possibility that interest rates could remain higher for longer — or potentially rise again if inflationary pressures intensify.

At the same time, any significant improvement in the global energy situation could reduce inflationary pressures and eventually create more room for interest rates to fall.

UK economy expected to grow

Despite the uncertainty, the Bank of England expects the UK economy to grow by 1.1% in 2026, which is stronger than previously forecast.

However, the economic outlook remains heavily dependent on developments in global energy markets and the wider geopolitical situation.

For households, the coming months could therefore remain uncertain, particularly as the cost of essentials, energy bills and borrowing costs continue to influence household finances.

The Bank of England says it will continue to monitor developments closely, with future decisions on interest rates likely to depend heavily on how long the current energy shock lasts and how severely it affects inflation.