BoE Holds Rates, Warns Inflation May Soar Above 4%

The Bank of England has kept interest rates at 3.75%, but warned that UK inflation is likely to rise above 4% early next year. Governor Andrew Bailey emphasized that a prolonged conflict in the Middle East could require tighter monetary policy, which would be aimed at ensuring inflation returns to the 2% target.

According to the Bank's latest forecast, inflation could exceed 4% in early 2027, up from its previous estimate of 3.2% in late 2026. The central bank also raised its estimate for quarterly economic growth in the third quarter to 0.4%, but noted that higher global energy costs have had a limited impact on price and wage setting in the UK so far.

However, Bailey cautioned that the longer these disruptions last, the greater their impact on inflation, and the more likely it is that interest rates will need to be raised. The Bank's Monetary Policy Committee voted 6-3 to keep interest rates unchanged, with three members backing an increase to 4%, in line with the median forecast of economists polled by Reuters.