The Bank of England's Monetary Policy Committee voted by a majority of six to three to keep its benchmark interest rate unchanged at 3.75% on 17 September 2026, despite mounting inflationary pressures stemming from the Middle East conflict and rising global energy costs. However, the committee warned that a continuation of the war could force it to raise borrowing costs in future, as it grapples with inflation accelerating to its highest level in six months.
Official data released on 16 September 2026 showed inflation rising to 3.1% in August, up from 2.9% in July, driven primarily by increases in petrol, diesel and airfare costs. Core inflation held steady at 2.6% for a fourth consecutive month, according to the Consumer Prices Index measure. All 65 economists polled by a financial research firm anticipated no change at the meeting, though the committee faces a complex policy landscape as it weighs competing pressures on the economy.
Bank of England Governor Andrew Bailey stated:
So far higher global energy costs have had a limited effect on price and wage setting in the UK. 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.Three members of the MPC were outvoted in their call for an immediate quarter-point increase in the base rate.
The decision reflects a cautious approach to monetary policy amid heightened uncertainty. The committee noted there had been
little evidence so far of material second-round effects– when inflationary pressures push businesses and workers to demand higher prices and pay settlements. There were also signs of weaker food price inflation despite the surge in energy prices triggered by the Middle East conflict.
At its July 2026 meeting, the MPC had signalled a willingness to raise rates if the regional conflict escalated. Bailey stated at the time:
If we get a continuation of this conflict going on and oil prices stay above $100 a barrel... the odds are that interest rates will have to go up higher.Oil prices breached the $100 mark on 9 September and have remained elevated since, with little indication of a durable ceasefire. The Bank has now warned that inflation is on track to reach 4% by early 2027 if energy price volatility persists.
The decision comes as other major central banks have tightened policy in response to similar energy shocks. The European Central Bank recently raised its rates to 2.5%, citing Middle East tensions and warning that inflation would remain significantly above its target for an extended period. The US Federal Reserve increased its rate to 3.5%-3.75% on 16 September 2026 for comparable reasons.
Despite these inflationary headwinds, the committee must balance its price stability mandate against the risk of dampening employment prospects. MPC members remain conscious that aggressive rate increases could pressure employers and worsen job market conditions for those seeking work. Nearly 90% of economists surveyed expected the Bank Rate to remain on hold for the remainder of 2026, though financial markets were still pricing in one quarter-point increase by year-end.
What changes to quantitative tightening?
The Bank announced an unexpected shift in its approach to unwinding its bond holdings, which had reached £895 billion at their peak. The committee said it would slow its quantitative tightening programme, reducing the annual pace of government bond sales to £50 billion from £70 billion. In a surprise move, the Bank also announced plans to sell £146 billion of bonds directly back to the Treasury at a pace of about £20 billion a year until 2034, a decision that will require agreement from the chancellor and could have major consequences for the public finances ahead of next month's budget.
The Bank said it would retain about £120 billion of bonds on its balance sheet, which are needed to back the issuance of notes and coins circulating in the economy. It said it would pause the current process of active gilt sales until a deal with the government could be reached on what to do with the remaining assets. Approximately £222 billion of bonds would be disposed of through a mixture of allowing the debts to mature and through active sales. If a deal to sell them back to the Treasury was not agreed, the Bank would resume selling the bonds back to large institutional investors.
How will mortgage borrowers be affected?
Households seeking to borrow face immediate pressure from rising mortgage costs, as major lenders have already repriced fixed-rate mortgages upwards in recent days in anticipation of the policy environment. The average two-year fixed residential mortgage rate has climbed to 5.77%, its highest level since 11 May, while the average five-year rate stands at 5.83%, the highest since 8 November 2023, according to financial information service Moneyfacts.
Andrew Montlake, chief executive of mortgage broker Coreco, warned that the inflation situation remains unresolved:
The inflation dragon has not been fully slain.He added:
If inflation proves sticky, lenders' funding costs stay under pressure, which makes cheaper mortgages harder to deliver. We are already seeing lenders reprice upwards, so this will do little to calm things down. Borrowers should not panic, but anyone approaching the end of a fixed rate should start looking early, secure an option and keep reviewing it.
What about savers?
Savers may benefit from more generous interest rates on deposits as lenders seek to attract funds in a higher-rate environment. However, any gains in nominal returns risk being eroded by the rising cost of living, as inflation continues to outpace savings rates for many products. Harriet Guevara, chief savings officer at Nottingham Building Society, advised households to take a measured approach:
It's almost impossible to time things just right, so I would urge households to focus on what's best for them now, in the medium term and in the longer term. For savers, regularly check that your savings are earning a competitive return and that you have the right balance between easy access and money you can afford to put away for longer.
What is driving the inflation spike?
The acceleration in inflation reflects a combination of factors, with energy prices playing a central role. The Middle East conflict has kept crude oil prices elevated, feeding through to consumer-facing costs for petrol, diesel and aviation fuel. Economists anticipate that these higher global energy costs will eventually transmit to food and fuel prices paid by households, suggesting that inflation may not have reached its peak.
Public inflation expectations have also risen, with 12-month expectations reaching 3.9% and longer-term expectations at 4.1% according to a survey conducted in August 2026. This shift in expectations could complicate the MPC's task, as elevated public inflation beliefs may influence wage-setting behaviour and spending decisions.
What happens next?
The Bank of England published its Monetary Policy Summary and detailed meeting minutes on 17 September 2026 at 12:00 GMT, following the rate decision announcement at 11:00 GMT and a press conference. The next scheduled UK inflation release after the August data is due on 21 October 2026, which will provide fresh evidence of whether price pressures are moderating or persisting. Financial markets are now predicting a quarter-point rise in borrowing costs from as early as November, with three further increases to 4.75% anticipated during 2027.
