Bank of England’s latest decision on base rate

Base rate held at 3.75% as energy price volatility drives up headline inflation

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-3 to maintain Bank Rate at 3.75% at its September meeting⁽¹⁾. Three members voted to increase Bank Rate by 0.25 percentage points to 4%.

In its latest Monetary Policy Summary, the MPC cited the prolonged conflict in the Middle East and resulting increases in crude and refined energy prices as important factors in the economic outlook.

Rising UK CPI inflation also informed the decision. Since the MPC’s July meeting, CPI inflation rose to 3.1% in August and is expected to increase further over the coming quarters.

The MPC said monetary policy would continue to be set to ensure inflation returns sustainably to its 2% target. It reiterated the appropriate policy stance would depend on the scale and duration of the energy price shock and the extent to which it feeds through to the wider economy.

So far, there has reportedly been little evidence of second-round effects on price- and wage-setting.

Sam Parkin, senior economist at BCIS, said: ‘Today the Monetary Policy Committee, which is the committee that decides Bank Rate for the Bank of England, kept rates steady at 3.75%. This is against the backdrop of rising headline inflation, which reached 3.1% year-over-year for August.

‘Why might the Bank have done this? The first reason is because of mixed economic activity. We’ve seen strong growth for AI, but contraction for construction. The second reason is because of core inflation. Core inflation is a more stable measure of inflation because it strips out energy prices. This is at 2.6% and has been for the last four months.

‘This isn’t to say that interest rate hikes won’t happen in the near term. In fact, financial markets are pricing in at least two interest rate hikes and one by the end of the year. The reason for this is because of sustained and heightened oil prices.

‘In addition to this, natural gas prices are on the rise. We’ve already seen one increase to the energy price cap in July. We’re seeing another increase in October and there’s speculation of another increase in January. These will increase the chances of interest rate hikes.’

In its commentary, the MPC said it expected the direct contribution of energy prices to inflation to increase over the coming quarters, reflecting further rises in wholesale oil, gas and electricity costs.

The committee also noted that labour demand remained weak, with evidence of slack in the market. However, some indicators of employment growth suggested a degree of resilience in economic activity.

Quantitative tightening

Separately, the MPC unanimously agreed to reduce the stock of UK government bond purchases to zero.

As part of its quantitative easing programme – through which the Bank bought bonds to support the economy during periods of significant disruption – the Bank of England accumulated £895 billion of bonds, the majority of which were UK government bonds.

Since 2022, the Bank has been reducing its holdings through quantitative tightening. The process has contributed to substantial increases in government borrowing costs.

Higher borrowing costs can feed through to construction by making finance more expensive, with direct implications for project viability and delivery.

The MPC has proposed setting out a more forward-looking plan for the remainder of quantitative tightening. Most members judged that the benefits of a fixed intended pace of unwind, and the greater predictability this would provide, would outweigh the loss of flexibility.

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^{(1) Bank of England – Bank rate maintained at 3.75% – September 2026 Monetary Policy Summary and Minutes – here}