The Bank of England (BoE) is holding its rate at 3.75%, even as UK inflation climbs and the US hikes. That divergence comes down to where the inflation is coming from.
The BoE’s Monetary Policy Committee (MPC) voted six to three to hold, with three members wanting an immediate hike. A day earlier, the Federal Reserve raised US rates to 4%.
Why the Fed Hiked and the BoE Didn’t
The Federal Reserve raised its benchmark rate a quarter point to a range of 3.75% to 4% on September 16. It was the first US rate hike since 2023, coming a day before the BoE’s own decision.
Both central banks are responding to the same shock. Energy prices have surged since the Middle East conflict disrupted supply. Brent crude has climbed above $100 a barrel, lifting UK inflation to 3.1% in August, up from 2.9% in July.
Governor Andrew Bailey argues rates cannot fix an oil-driven price shock directly. He also sees little evidence that higher energy costs are spreading into wages. The Fed, facing a stronger labor market and its own inflation concerns, chose to act instead of waiting.
Economists at Dutch bank ING say the UK carries less wage-spiral risk now than in 2022. That gives the BoE more room to wait before raising rates.
Why Households Are Already Feeling It
UK households are not waiting for a formal hike to feel the cost. The average five-year mortgage rate has climbed to 5.87%, its highest level since November 2023. Lenders are already pricing in the chance of tighter policy ahead.
That leaves the BoE balancing two risks. Moving too fast could squeeze an already fragile economy. Waiting too long risks letting the energy shock harden into a lasting wage-price spiral.
Three policymakers already want a hike, and the Fed just moved the opposite way. If energy prices stay elevated, 3.75% may not be the final stop this year.
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