The Bank of England kept its benchmark rate at 3.75% on Wednesday, a decision that stands in sharp contrast to the Federal Reserve's move just a day earlier to raise US rates to a range of 3.75% to 4%. The divergence between the two central banks hinges on their differing assessments of where current inflation is coming from and how it might evolve.
The Bank of England's Monetary Policy Committee voted six to three to hold the rate steady, with three members advocating for an immediate increase. This decision followed the Federal Reserve's September 16 move, which marked the first US rate hike since 2023. Both institutions are reacting to the same global shock: energy prices have surged following supply disruptions caused by the Middle East conflict. Brent crude has climbed above $100 a barrel, a factor that pushed UK inflation to 3.1% in August, up from 2.9% in July.
Bank of England Governor Andrew Bailey argues that interest rates cannot directly address an oil-driven price shock. He points to a lack of evidence that higher energy costs are spreading into wages, suggesting that a rate hike is not yet necessary. In contrast, the Federal Reserve, facing a stronger labor market and its own distinct inflation concerns, chose to act rather than wait.
Economists at Dutch bank ING note that the UK currently carries less wage-spiral risk than it did in 2022. This assessment gives the Bank of England more room to wait before tightening policy further. However, UK households are already feeling the financial strain without a formal rate hike. The average five-year mortgage rate has climbed to 5.87%, its highest level since November 2023, as lenders price in the possibility of tighter policy ahead.
The Bank of England is now balancing two competing risks. Moving too quickly could squeeze an already fragile economy, while waiting too long risks allowing the energy shock to harden into a lasting wage-price spiral. With three policymakers already calling for a hike and the Federal Reserve having just moved in the opposite direction, the path forward remains uncertain. If energy prices remain elevated, 3.75% may not be the final stop for UK rates this year.