Bank of England Holds Rates at 3.75% as Energy Prices Lift Inflation
The Bank of England kept its main interest rate at 3.75% in September 2026. The Monetary Policy Committee, the group that sets rates, voted six to three to hold. That was the same split as in July. The Guardian
Inflation, the pace at which prices rise, reached 3.1% in August 2026. Higher fuel prices drove the increase. Renewed conflict in Iran pushed world oil prices back above $100 a barrel. The Committee expects inflation to rise above 4% in the first three months of 2027.
Governor Andrew Bailey said borrowing costs may have to rise, or tighten, if fighting in the Middle East continues. Mortgage rates in Britain had already risen. Markets had pushed up borrowing costs in expectation of higher inflation, even though the Bank did not change its rate.
The U.S. Federal Reserve and the European Central Bank moved the other way. Fed Chair Kevin Warsh raised U.S. borrowing costs in September 2026. It was the first U.S. increase since 2023, and it went against President Trump's calls for cuts. The European Central Bank raised rates in the week before 17 September 2026, warning that the Iran war was adding to inflation. The Guardian
The hold came two months into a new government. Andy Burnham became prime minister in July 2026, succeeding Keir Starmer. Burnham began with cost-of-living measures, including a cap on bus fares and a cut to VAT, a tax, on household electricity bills.
The broader context here is an energy-led shock with limited tools to meet it. Prices are rising because fuel costs are passing through the economy, not because demand is too strong. Rates work like brakes on spending. They can limit second-round effects, when fuel rises feed into wages and other prices, and steady expectations and the pound. They cannot supply oil. The near-term concern is pressure on two fronts, with business input costs rising while borrowing gets more expensive.
Looking at what this means for London, state support and borrowing costs are pulling in opposite directions. Targeted help on buses and electricity aims to protect real household incomes. Higher mortgage pricing does the reverse through the credit channel, by making loans costlier. Markets had already tightened conditions before the Bank met. That early tightening shortens the time the Bank has to judge whether the oil move will last.
In my view, the steady six-to-three split since July points to disagreement over timing, not diagnosis. A minority favours raising rates sooner to stop energy inflation from sticking. A majority prefers to hold while the path clears. Rises by the Fed and the ECB do some of the work through exchange rates and bond markets, but they also make it harder for Britain to stay apart. If crude stays above $100 and expectations drift, pressure to follow will build. If the conflict eases, the hold will look patient. Fuel, wages and expectations data will decide the next move.
