Bank of England rate decision keeps Bank Rate at 3.75%

The Bank of England rate decision left Bank Rate at 3.75% on 17 September, despite UK consumer-price inflation reaching 3.1% in August. The Monetary Policy Committee voted 6-3 to hold, one day after the Federal Reserve raised its benchmark rate by a quarter point, according to an Associated Press report.

Three MPC members voted for an immediate 0.25-percentage-point increase, which would have taken Bank Rate to 4%. The split underscored the Committee's concern about inflation above its 2% target, even as a majority chose not to raise rates at this meeting.

The Bank said protracted Middle East conflict had pushed crude and refined energy prices higher and made them more volatile. It expects UK inflation to rise further over coming quarters. The Bank's minutes said that roughly 0.7 percentage points of August's 1.1-percentage-point overshoot of the target reflected direct energy-price effects, principally motor fuels.

Why did the Bank of England hold rates at 3.75%?

The Bank said it had seen little evidence so far that the energy shock had created material second-round effects in UK price- and wage-setting. Second-round effects occur when an initial rise in costs is followed by wider increases in wages or prices, potentially making inflation more persistent.

The Wall Street Journal reported that most policymakers saw few signs of higher energy costs spilling into everyday prices. The Bank's own account also cited soft labour-market conditions and higher borrowing costs for households and businesses since the conflict began as factors expected to reduce inflation over time.

Governor Andrew Bailey said higher global energy costs had so far had a limited effect on UK price and wage setting. He added that a longer period of volatile energy prices would increase the likelihood that Bank Rate would need to rise to return inflation to the 2% target.

The MPC said risks to the inflation outlook were tilted to the upside, more so than at its July Monetary Policy Report, while stressing that the outlook could change materially as events in the Middle East developed. It said it stood ready to act as necessary to ensure inflation returned sustainably to target in the medium term.

What else did the MPC decide?

Separately, the Committee unanimously approved a multi-year plan to reduce to zero the stock of government bonds bought for monetary-policy purposes. Under the plan, the remaining holdings will be unwound at an average annual pace of £46 billion by the end of 2034, including £20 billion of annual sales alongside maturing gilts, according to the Bank.

Bank Rate is the central bank's core policy rate. The Bank says it influences the lending and savings rates set by commercial banks, building societies and other financial institutions. The next MPC decision is due on 5 November, according to the Bank.

This story draws on original reporting from CNBC.