BOE Holds Rates Amid Energy Price Fears

The Bank of England has decided to hold interest rates at 3.75% for a sixth consecutive meeting, despite concerns that higher energy prices could lead to further rate increases.

The Monetary Policy Committee voted 6-3 to leave Bank Rate unchanged, with three members voting for an immediate 0.25 percentage point increase to 4%. The decision comes as UK inflation reached 3.1% in August and is expected to rise to slightly above 4% at the start of next year.

Governor Andrew Bailey warned that if the conflict continues and there's evidence of second-round effects on wages and prices, 'policy may have to tighten'. The Bank said there was limited evidence that the energy shock was feeding into underlying inflation, but noted that domestic inflationary pressures continue to ease while the labour market remains weak.

The decision leaves borrowing costs unchanged for UK small and medium-sized enterprises (SMEs), which are still dealing with higher operating costs and weaker demand. The prospect of further rate reductions had offered some scope for cheaper finance and investment, but the renewed risk of rate rises could delay that easing of financial pressure.

The Bank also announced a change to its quantitative tightening programme, which will reduce its holdings of UK government bonds built up through quantitative easing. It plans to sell around £20bn of shorter-dated gilts a year while allowing other bonds to run off as they mature.