Bank of England Set to Hold Rates at 3.75% as Inflation Risks Climb

Q: With inflation set to surge, is the Bank of England's divided vote a sign of caution or a major policy error?

It looks more like caution than a major policy error, though the risk of a mistake is real if energy-driven inflation starts feeding into wages and broader prices. The case for holding rates is strong. The Bank Rate is already restrictive at 3.75 per cent, the labour market is weakening, vacancies are at their lowest since 2021, and growth has turned patchy after a solid first quarter. Governor Andrew Bailey and most MPC members argue that this is mainly an external energy shock, not a demand boom, and higher rates cannot stop oil or gas prices rising. They also note that financial conditions have already tightened as markets priced in a tougher outlook, which should help cool activity and inflation over time. That said, the hawks are not crying wolf. Huw Pill voted for an immediate rise, and Megan Greene and Catherine Mann have both warned that persistent energy costs could trigger “second-round” effects. Inflation expectations have risen sharply, with the Citi/YouGov one-year measure at 5.4 per cent in March, and the Ofgem price cap is due to jump 13 per cent in July. The Bank’s own scenarios suggest rates may need to go materially higher if those pressures become embedded. So the split is best read as a deliberate wait-and-see stance, not complacency. But the Bank has little room for error after past criticism that it moved too slowly on inflation. If wage growth and pricing behaviour harden over the summer, today’s caution could quickly look like delay.

3 articles · Updated · Financial Times · Jun 15

Thursday’s Bank of England meeting is widely expected to leave the key rate at 3.75%, even as inflation worries intensify inside the Monetary Policy Committee.
At least two policymakers — chief economist Huw Pill and external member Megan Greene — have signaled they want an immediate hike, arguing the energy crisis could entrench wage and price pressures.
2.8% April inflation is still expected to rise to 3.3% for 2026 as higher oil prices and a summer increase in the energy price cap feed through.
705,000 job openings in the three months to April, weaker wage expectations and an April economic contraction have strengthened Andrew Bailey’s case for caution despite the inflation threat.
The BoE faces added pressure as the ECB has already raised rates to 2.25% and the Bank of Japan is expected to tighten, sharpening the debate over whether markets will force UK hikes later.