The Bank of England is widely expected to leave its key interest rate unchanged at 3.75% on Thursday, even though inflation is again running well above the central bank’s 2% target. LSEG data shows markets are assigning more than an 80% chance to a hold at this meeting, although a rise of at least 25 basis points is still broadly expected at the next meeting in November.
If that happens, the Bank of England will stand apart from other major central banks. The U.S. Federal Reserve raised rates by a quarter point on Wednesday, its first hike since 2023. The European Central Bank last week delivered its second increase of the year, and the Bank of Japan is also expected to lift its key rate at the end of its meeting on Friday.
The Bank of England has not changed rates at all in 2026. Its last move came in December, when it cut the policy rate by 25 basis points.
Data released on Wednesday showed U.K. consumer price inflation rose to 3.1% in August, the first reading above 3% since March. The Office for National Statistics (ONS) said the jump was driven in large part by motor fuel prices, which surged 23% year on year.
As a net energy importer, the U.K. remains particularly exposed to external energy shocks. The country is also still dealing with the effects of a cost-of-living crisis shaped by post-Covid inflation and the impact of the Russia-Ukraine war on natural gas supplies.
British government bonds, or gilts, have been under pressure this year amid global inflation worries, political instability and concerns over U.K. fiscal policy. Britain currently faces the highest borrowing costs in the G7, with yields on 20- and 30-year gilts approaching 6%.
Earlier this week, The Telegraph reported that the Bank of England could announce plans alongside its rate decision to stop selling 20- and 30-year gilts.
Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the latest rise in inflation was “unlikely to convince the Bank of England to hike interest rates just yet,” but it could create fresh concern among policymakers about the inflation outlook. He added that the U.S.-Iran conflict began more than six months ago, but higher energy costs are still feeding through to business input prices and household spending.
Deutsche Bank FX strategist Shreyas Gopal also said the lack of any materially hawkish surprises in this week’s U.K. labor market and inflation figures had been enough for pricing of a hike at the upcoming meeting to ease back again.
