Three of nine. That was the minority on the Bank of England’s rate-setting committee that wanted to raise borrowing costs to 4% on Thursday. The other six voted to hold at 3.75%, and they won, but the split says where the argument is heading.
The cause is the Iran war. The Monetary Policy Committee said global energy prices are volatile and will probably push inflation higher by the end of the year than it had expected. On the committee’s new numbers, CPI inflation reaches about 3.75% by the end of 2026 and peaks near 4% at the start of 2027. The earlier forecast for year-end was about 3.2%. The committee called the Middle East conflict and its effect on energy prices “the dominant source of uncertainty for the inflation outlook”.
The Bank’s governor, Andrew Bailey, was blunt about the trade-off: “the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank rate to ensure that inflation falls back to our 2% target.” Other members said the case for a rise builds the longer the war lasts. The worry is so-called second-round effects, meaning higher wage demands and higher prices in shops.
What is already showing in prices
The latest official figures put CPI inflation at 3.1% last month, up from 2.9% in July and a five-month high. Petrol and diesel, now at multi-year highs, did most of the damage. From next month households also face another rise in gas and electricity bills when Ofgem’s new price cap takes effect. The Government has said it will drop VAT from energy bills between October and March to give households “breathing space”.
Suren Thiru, an economist at the Institute of Chartered Accountants in England and Wales, said the Bank has left the “door wide open” to a November rate hike. “Interest rates are at a critical cliff-edge moment,” he said. Policy could stay on hold this year, he added, but with US-Iran hostilities persisting, a rise has shifted from a possibility to a probability.
A change to bond selling
The Bank also reworked its quantitative tightening programme. It wants Mr Healey to approve a new method that would effectively sell a stock of gilts back to the Government instead of to financial markets, and it is pausing its current gilt auctions until that is settled. Over the next eight years the gilt stock will shrink by an average of £46 billion a year, through maturities and annual sales averaging £20 billion. A substantial share will not be sold at all and will be set aside to back the issuance of bank notes.
Bailey said the Bank had “provided clarity over the future” of the programme. Gilt yields, which have soared to fresh highs in recent weeks, fell on the news. The 30-year yield dropped to about 5.72%, its lowest in more than a month.
