The Bank of England has kept its key interest rate unchanged at 3.75%, but the decision came with a notable shift within the committee that set its policy. Rather than the widely watched question of when borrowing costs might be cut, attention turned to a push in the opposite direction, as three members broke ranks to call for higher rates.
The Bank's Monetary Policy Committee split six to three in favour of holding the rate steady, with no member voting for a cut. The three policymakers who dissented wanted to increase the bank rate by 0.25 percentage points, taking it to 4%. It amounted to a minor but clear move in a more hawkish direction on the committee.
The composition of the vote drew attention from those who follow the Bank closely. Former Bank of England Monetary Policy Committee member Andrew Sentance said the vote had probably moved slightly more in a hawkish direction than he had been expecting, although he added that the decision to hold rates itself was in line with what he had forecast.
Behind the split lies concern about the path of inflation. The Bank is forecasting a rise in inflation, which is expected to pick up in the autumn to around 3.75%. Sentance said some members had concluded that the Bank needed to safeguard against a general rise in inflation, and were therefore pushing for an increase in interest rates now.
Part of that pressure is coming from energy costs tied to the conflict involving Iran and the Strait of Hormuz. While global oil prices have softened to around 80 dollars a barrel, the higher prices paid a couple of months ago are still feeding through the economy. Sentance noted that oil had moved up from about 60 to 70 dollars a while ago to around 90 to 100 dollars, and that this was reaching consumers.
According to Sentance, the main concern for the committee is not the oil price rise in isolation, nor even its knock-on effect on gas prices, but how it permeates through the wider economy. It is that risk of a broader inflationary problem taking hold that the Monetary Policy Committee will be especially alert to and concerned about in the months ahead.
The Bank also set out a weaker outlook for the labour market, expecting the unemployment rate to increase slightly to 5% in the third quarter of 2026 and 5.1% in the fourth quarter. Economists polled by the Reuters news agency do not expect a rate hike this year, but the markets do, leaving an unsettled picture over how policy will evolve through the autumn.