3.75% for now. The next move depends on Trump, not Threadneedle Street.
The Bank of England has held the UK Base Rate at 3.75% for the sixth meeting in a row. The Monetary Policy Committee voted 6–3, with three members wanting a quarter-point rise to 4%. That puts the Bank at odds with the Federal Reserve and the European Central Bank, both of which have tightened within the past week.
The message alongside the hold was clear enough: if high energy prices persist, rates are more likely to go up than down. The core question for UK interest rates is now a simple one. Will energy prices keep rising?
What the data says so far
The pass-through of a surge of energy costs into consumer prices has been smaller than I had feared. Consumer price inflation was 3.1% in the year to August, up from 2.9% in July, the first reading above 3% since March, and driven largely by a 23% annual jump in motor fuel prices. Energy costs are much higher than they were, but nowhere near the levels seen in 2022.
Wholesale markets are a different story. Brent crude and UK wholesale gas have risen 36% and 78% respectively since July, with Brent at $106 a barrel and gas at 207 pence per therm on 14 September. That is the pipeline of pressure still to come through.
The Bank's revised forecast
The Bank now projects consumer price inflation reaching over 4% early next year, driven by energy prices and expected increases in food price inflation. A lot of that relates to the household price cap. Ofgem's cap for October to December has been set at £1,723, somewhat higher than the Bank expected in July.
The Bank also flagged that both energy and food inflation will be uncomfortably high ahead of wage negotiations next spring.
My view
Governor Andrew Bailey acknowledged that elevated global energy costs haven't yet significantly fed through into UK prices or wages, but cautioned that continued volatility would increase the pressure to act.
Central banks right now don't want to overreact to what could still be a short-term bump in energy prices, one that can be contained to energy alone. If the shock is brief, the direct effect shows up in the headline number, drops out again a year later, and the Bank doesn't need to do much.
If the conflict with Iran goes on longer, that containment breaks down. Businesses can't absorb higher input costs indefinitely, so they get pushed through into the price of products and services. Workers then look for wage rises to keep up. At that point the energy shock has become general inflation, and the three dissenters on the committee start looking right.
Where this leaves us
Everything hinges on how long the Trump Administration keeps the Iranian conflict going, and with it, how long the Strait of Hormuz stays shut.