Bank of England holds interest rates as inflation remains high

The Bank of England has decided to hold interest rates at 3.75%, despite persistent high inflation.

Inflation rose to 3.1%, while the US Federal Reserve yesterday also raised interest rates for the first time in years.

In a divided vote, the Bank of England Monetary Policy Committee (MPC) voted 6-3 to keep the Bank Rate unchanged.

Three members voted to increase the Bank Rate by 0.25 percentage points, to 4%.

The MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, to zero.

Raise interest rates to tackle inflation

Andrew Bailey, governor of the Bank of England, admitted a rise in interest rates before the end of the year could happen.

He said: “We’ve held Bank Rate at 3.75%. So far, higher global energy costs have had a limited effect on price and wage setting in the UK. But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target.”

The MPC said of its decision: “Monetary policy is being set to ensure inflation comes down to 2% sustainably as the economy adjusts to the energy shock. The policy stance required to achieve this will depend on the scale and duration of the shock and how it propagates through the economy.

“There has been little evidence so far of material second-round effects in price and wage-setting. However, the risk of such effects, against which policy needs to lean, is greater the longer higher energy prices persist or are more volatile. Activity has been slightly stronger than expected, although soft labour market conditions, and the higher interest rates faced by households and businesses since the conflict began, will act to reduce inflation over time.

“Overall, the Committee judges that the risks to the inflation outlook are tilted to the upside, and more so than at the time of the July Monetary Policy Report, although there remains scope for the outlook to change materially as events in the Middle East unfold.”

Industry reaction

Jeremy Leaf, North London estate agent and a former RICS residential chairman, said a rise in interest rates will happen sooner rather than later.

He said: “The decision to leave rates unchanged, which seemed fairly straightforward a few weeks ago, is now a little trickier. A rise in interest rates is becoming increasingly likely and now sooner rather than later.

“The impact of an uplift on an already fragile, price-sensitive housing market, would not be helpful. Recent house price and mortgage approval figures confirm that a significant recovery is unlikely in the near future. The rising cost of living has made it increasingly difficult for prospective homebuyers to consider moving unless needing, rather than wanting, to do so.

“The Bank is grappling with inflation, now back over 3 per cent, and Swap rates, at a three-year high, which is prompting lenders to push up their mortgage pricing.”

Mortgage rates have been edging up

Amy Reynolds, head of sales at Richmond estate agency Antony Roberts, says: “Lenders haven’t waited for the Bank of England. Mortgage rates have been edging up this week ahead of today’s decision, which tells you the market has already stopped pricing in quick cuts, and with inflation still sitting above target, we expect rates to be held rather than fall this side of Christmas.

“That isn’t a crisis, but it does mean buyers waiting for a cheaper mortgage to rescue their budget could be waiting a long time.”

Surprising decision

Joshua Elash, founding director of specialist lender MT Finance, said: “The fact that the base rate has been held at 3.75 per cent in the wake of inflation rising in August is surprising.

“While we weren’t relishing the idea of a base rate rise, the MPC needs to get a handle on inflation as we move into autumn. This doesn’t seem to be happening. All eyes will now be on the Chancellor’s first Budget in October.”

Autumn Budget next month

Nathan Emerson, chief executive, at Propertymark said: “When considering the wider economic pressures currently in focus, it is positive news to see the Bank of England’s Monetary Policy Committee take the decision to maintain the base rate at 3.75%.

“With a backdrop of continued global unease, many aspects of the housing market have become substantially more subdued than normal, with consumers rightly acting with a greater degree of caution before committing to longer-term and high-value borrowing.

“It will be a case of closely watching what might be announced in the Autumn Budget next month, particularly concerning housing and what support may be offered to first-time buyers, for example.”

Caution from buyers

Emily Williams, director of research at Savills, comments: “Despite today’s MPC decision to hold rates, we do expect to see more caution from buyers in the coming months given the increases to fixed rate mortgages over the last fortnight.

“However, buyers can take confidence from the housing market’s resilience so far this year.

“Despite continued geopolitical uncertainty and rising inflationary pressures, house prices have increased by 1.6% in the first 8 months of the year according to Nationwide, more than double the rate of growth over the same period in 2025.

“Although the market is still pricing in an expectation for an increase in the base rate over the next year, there are other factors which provide insulation for the housing market. The strict application of mortgage regulation and the extensive use of fixed rate mortgages mean the risk of forced sales remains low. And as wage growth has outstripped house price growth since 2022, housing affordability is far less stretched than the last time the UK faced increasing levels of inflation.”

Wait and see approach

Jason Tebb, President of OnTheMarket, comments on the interest rate hold: “As expected, the Bank of England kept base rate at 3.75 per cent for another month.

“With the rate of inflation rising to 3.1 per cent in the 12 months to August, there were concerns that this would persuade the Committee to increase the base rate at this meeting. However, its ‘wait and see’ approach continues for now at least.

“Although six members of the Committee voted for a hold while three favoured a quarter-point increase to 4 per cent, this was the same spit as at the last meeting, with the majority continuing to favour the current position.

“While interest rate cuts are helpful in boosting buyer and seller confidence, this sixth consecutive base rate hold suggests a steadiness and stability which is no less welcome, particularly with the Budget approaching. Our advice to agents and homeowners is the same as always: do not sit on your hands waiting for the political dust to settle, because it never fully does, so focus on what you can actually control.”