The Bank of England is expected to hold Bank Rate at 3.75 percent on Thursday, a sixth straight unchanged decision, as the Monetary Policy Committee weighs falling core inflation against an energy shock that has pushed Brent crude above $107 a barrel.
Most economists in the City expect no change, and the case for holding is straightforward. UK inflation has fallen to 2.9 percent, closer to the 2 percent target than most forecasters expected six months ago. But the Bank’s own July statement warned that energy prices are high and volatile because of the conflict in the Middle East, and that it still expects inflation to rise later this year as higher bills feed through into business costs.
Governor Andrew Bailey set out the framework in July. “Monetary policy cannot affect global energy prices; our job is to make sure that higher inflation does not persist and have long-lasting effects on the economy,” he said when the MPC last held rates. That logic has only grown stronger as oil has climbed. Brent for November delivery traded between $107.75 and $108.38 on Monday, up nearly 3 percent on the day, after fresh strikes in Saudi Arabia and renewed attacks on Gulf shipping. The East-West pipeline, capable of carrying 7 million barrels a day to Red Sea terminals, is offline with no public repair timeline.
The split-vote problem
The complication is not the level of rates but the composition of the committee. The Independent reported that the vote is expected to split, with some members arguing the Bank “needs to be ready” to hike if energy prices keep climbing. A hold with dissenting votes for tighter policy would signal a committee leaning hawkish without moving, and markets would read the minutes accordingly.
The eurozone comparison sharpens the point. European Central Bank officials have indicated that energy volatility from the Middle East conflict could keep inflation elevated for an extended period, and Europe is more exposed to an energy price shock than the United States, which is energy independent. Commonwealth Bank of Australia strategist Carol Kong noted that currency moves have tracked countries’ imported energy dependence, with the euro and sterling among the underperformers. The pound held near $1.3374 in recent trading, a little above its weakest point of the year.
Japan faces the same squeeze from the other direction. The Bank of Japan meets September 17-18 with markets fully pricing a 25 basis point hike to 1.25 percent, a level last seen in 1995. For an economy almost entirely dependent on energy imports, Brent above $107 revives the inflation problem just as the BOJ tries to normalize policy. The yen has climbed in recent weeks as tightening expectations built, after briefly depreciating past 159 per dollar earlier in the year.
| Central bank | Meeting | Expected outcome | Key pressure |
|---|---|---|---|
| Federal Reserve | Sept 15-16 | 25bp hike, 85 percent priced | Hot August PPI, oil |
| Bank of England | Sept 17 | Hold at 3.75 percent | Energy inflation, split vote |
| Bank of Japan | Sept 17-18 | Hike to 1.25 percent | Import costs, weak yen history |
What the oil market is doing to the decision
Three weeks ago Brent crossed $100 for the first time since July. It has added another 8 percent since. The Houthi advance along the Yemeni coast and the closure of the Saudi pipeline have removed supply at the same moment diplomatic talks in Oman were postponed. Diesel, gasoline and jet fuel prices remain far above pre-war levels, which is the channel that reaches consumer inflation directly. The pipeline closure alone removed as much as 7 million barrels a day of export capacity, and traders have repriced the risk of longer disruption rather than a quick repair.
For the MPC, the question is whether the energy shock is a temporary level shift or a persistent one. The Bank’s July view was that the increase would be temporary but larger than previously thought. With the pipeline still shut and shipping attacks continuing, the persistence assumption is being tested. A committee that expects inflation to rise later this year cannot ignore a supply shock still unfolding the week of its decision.
UK markets have already adjusted. Ten-year US Treasury yields approached 5 percent this week, and gilts have followed the global move. The VIX rose 9 percent on Monday. European equities opened lower, with the FTSE MIB in negative territory and oil stocks the notable outperformers, a rotation that reflects the same energy arithmetic the MPC faces. Tokyo closed down 0.81 percent ahead of the Fed decision, with Japanese industrial production for July revised downward, adding a growth worry to the BOJ’s inflation one.
There is one domestic offset. The Bank noted in July that mortgage rates and borrowing costs are higher than before the conflict, making households more cautious, and that more people are looking for work than there are jobs available. Weak labor demand should contain wage-driven inflation and partially offset the energy impulse. That balance is why a hold remains the base case even with oil where it is. Cutting into an energy shock is not on anyone’s ballot, and hiking without evidence of second-round effects would be hard to defend with the labor market softening.
Whatever the committee does Thursday, the direction of travel is set by events outside Threadneedle Street. The pipeline repair timeline, the status of Gulf shipping and the outcome of the Fed meeting a day earlier will do more for UK inflation expectations than any vote the MPC takes this week. The most a well-run committee can do is be ready, and Thursday’s minutes will show whether it is.