The Bank of England warned it may need to raise interest rates because of the Middle East energy crisis even as it moved to ease pressure on bond markets by overhauling its balance-sheet reduction policy.
The Monetary Policy Committee voted six to three to hold rates at 3.75 per cent on Thursday, as had been expected by financial markets. the move comes as the Federal Reserve raised its rates on Wenesday evening.
Governor Andrew Bailey put households and businesses on notice that“policy may have to tighten”, with inflation forecast to head above 4 per cent next year.
The bank also said it would continue to reduce the scale of its balance sheet but overhaul its approach, keeping £120 billion (€139 billion) of debt on its books permanently while setting out a plan to sell off its remaining holdings of gilts at a slower pace.
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Sterling was stable in immediate trading after the expected hold, little changed against the dollar at $1.338.
The UK’s long-dated borrowing costs fell following the overhaul of its programme, which implied a reduction in the pace at which it is shrinking its balance sheet this year.
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The 30-year gilt yield was down 0.07 percentage points at 5.77 per cent. The two-year gilt yield, which is more sensitive to changing interest rate expectations in the short term, fell 0.05 percentage points to 4.71 per cent. Yields fall when prices rise.
The overhaul comes after the bank came under fire for its asset sales, which have added to pressure on government borrowing costs. The BoE will now conduct active sales of gilts at a pace of £20bn a year until the end of 2034.
Thursday’s rate decision comes a day after official figures showed inflation rose to 3.1 per cent in August, well above the BoE’s 2 per cent target.
The MPC has resisted raising rates in response to surging energy prices as policymakers await further evidence that high inflation is becoming entrenched in the economy.
On Wednesday, the US Federal Reserve lifted borrowing costs for the first time since 2023 to combat price pressures. The European Central Bank has raised rates twice since June.
The US Federal Reserve has raised rates for the first time since 2023 as chair Kevin Warsh defied US president Donald Trump’s calls for lower borrowing costs and tries to curb the jolt of inflation sparked by the Iran war.
The Federal Open Market Committee (FOMC) voted unanimously to increase the benchmark federal funds rate by a quarter point to a 3.75 per cent to 4 per cent range, in line with Wall Street’s expectations.
The FOMC said the rise “will support a timelier return” of inflation to the Fed’s 2 per cent target – a goal it has missed for 5½ years.
“The committee will deliver price stability,” it added.
The decision comes as Warsh and other rate-setters attempt to stop the boom in energy prices ignited by the Middle East conflict from morphing into a wider inflation crisis. The European Central Bank raised its rates last week.
It comes just months before midterm elections in the US in which affordability will be a major issue among voters. Ahead of the meeting, investors had priced in a more than 90 per cent chance of a rate increase after the closely watched consumer price index reading for August signalled progress on returning inflation back to the Fed’s goal had stalled.
A fresh set of interest-rate projections, also published on Wednesday, indicated most of the committee anticipate another quarter-point rate rise before the end of the year. – Copyright The Financial Times Limited 2026
