Interest rates held at 3.75% but Bank warns Iran war could mean future hike

The Bank of England has held interest rates at 3.75%, but policymakers warned that pressure to raise rates is building as the Iran war goes on.

The Bank’s monetary policy committee (MPC) said global energy prices were volatile and likely to push inflation higher by the end of the year than it was previously expecting. The decision to hold interest rates at 3.75% marks the sixth time in a row that the MPC has not changed borrowing costs. But it follows a split vote among the nine-person committee, with six members voting to hold them steady and three calling to raise rates to 4%. Governor Andrew Bailey, who voted for a hold, said: “So far higher global energy costs have had a limited effect on price and wage setting in the UK.” This refers to so-called second-round effects, meaning things such as higher wage demands among the UK workforce and prices that are charged in shops. He went on: “But 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.” Economists have been warning that borrowing costs may have to be hiked in the months ahead to tackle rising inflation in the UK. The rate of Consumer Prices Index (CPI) inflation rose to 3.1% last month, up from 2.9% in July and reaching a five-month high, the latest official figures showed. This was driven largely by petrol and diesel prices, which have risen to multi-year highs. Households are also facing another rise in their gas and electricity bills from next month when Ofgem’s new price cap comes into effect. Based on recent wholesale energy prices, the MPC said it was now expecting CPI inflation to rise to about 3.75% by the end of 2026 and peak at about 4% by the start of 2027. This compares to its previous forecast of CPI at about 3.2% by the end of the year. The committee said the conflict in the Middle East and the impact on energy prices at the UK economy “remained the dominant source of uncertainty for the inflation outlook”. Other policymakers on the MPC said the case for raising interest rates was building the longer the war goes on. Meanwhile, the Bank of England set out the next stage of its work to sell off government bond purchases, known as gilts, under its quantitative tightening (QT) programme. This will see the stock of gilts reduced at an average pace of £46 billion a year over the next eight years as they mature and through annual sales of £20 billion – which is down from the previous annual average of £87.5 billion over the past four years. A substantial portion of the gilts will not be sold and will be set aside to back the issuance of bank notes. Mr Bailey said the Bank had “provided clarity over the future” of its QT programme.

Published: 17/09/2026 by Radio NewsHub