MPC votes 6-3 to hold as inflation heads for 4%, while a plan to sell £146bn of bonds back to the Treasury complicates the fiscal backdrop for November’s Budget
The Bank of England left Bank Rate unchanged at 3.75% on Thursday, its sixth consecutive hold, but signalled that a rate rise is becoming increasingly likely if the conflict in the Middle East keeps energy prices elevated. The Monetary Policy Committee voted 6-3 to hold, with three members, Megan Greene, Catherine L Mann and Huw Pill, preferring an immediate quarter-point rise to 4%.
Governor Andrew Bailey said higher global energy costs had so far had “a limited effect on price and wage setting in the UK”, but warned that “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 Bank now expects CPI inflation, which rose to 3.1% in August from 2.9% in July, to reach around 4% by early next year, driven largely by motor fuel costs. It raised its third-quarter GDP growth forecast to 0.4%, up from 0.1% projected in July, even as business surveys point to “somewhat weaker growth” ahead.
The Committee judged there had been “little evidence so far of material second-round effects”, the point at which higher costs start feeding into wage demands and broader price-setting, and noted food price inflation had undershot expectations, easing some of the pressure on the headline number.
A surprise twist on quantitative tightening
Alongside the rate decision, the Bank unveiled a significant change to how it plans to unwind quantitative easing. Having bought £895bn of gilts at the peak of its asset purchase programme, the Bank proposed selling £146bn of that stock directly back to the Treasury at a rate of £20bn a year through to 2034, a move that would need the Chancellor’s agreement. It would retain around £120bn of gilts on its balance sheet to back banknotes and coins in circulation, and confirmed it would pause further gilt sales to the open market while a deal with government is negotiated on the remaining roughly £222bn; absent an agreement, it said it would resume selling those bonds to institutional investors.
The timing lands awkwardly for Chancellor John Healey, who delivers his first Budget in the autumn. Joe Nellis, head of economic research at accountancy firm MHA, said the backdrop was “uncomfortable” for the government, noting that elevated gilt yields were already pushing up the cost of servicing the national debt, with the interest bill for the current financial year likely to reach around £115bn. “The Chancellor will need to convince financial markets that the state of public finances remains credible,” he said, warning that unfunded spending commitments could risk “a vicious circle” of rising borrowing costs.
Markets now pricing a November move
Felix Feather, an economist at Aberdeen, said the hold was no surprise and the vote split “not as close as it might have been”, but flagged November’s meeting, which comes with a full forecast round and press conference, as “a natural starting point for a hiking cycle”. Aberdeen’s house view is now for two 25 basis point rises, in November and again three months later, with Feather adding that the economy’s resilience to higher energy costs makes it “increasingly unlikely that rates will fall very far back below their current level of 3.75% even after the energy cost shock abates.” The decision follows the US Federal Reserve’s first rate rise since 2023 on Wednesday and a similar move by the European Central Bank, suggesting the era of globally synchronised rate cuts may be drawing to a close.
What it means for UK wealth management clients
For advisers, the message is one of a genuine two-sided risk that has shifted firmly toward the upside since July. Clients holding cash and short-duration fixed income have been rewarded for staying there, and that logic strengthens further if November brings the first hike since before the current cutting cycle began. Anyone relying on further mortgage or borrowing-cost relief this year should be advised to plan around rates staying at or above current levels rather than falling, while the proposed gilt-Treasury transfer, still subject to government agreement, adds a fresh source of uncertainty to gilt supply and pricing that is worth watching into the Budget. With the Bank itself flagging the risk of a November hike and the Chancellor facing a tougher fiscal arithmetic as a result, this is not a moment for portfolios built solely around the soft-landing, rate-cutting scenario that looked more likely earlier in the year.
