The Bank of England’s ratesetting committee held interest rates for the sixth consecutive time at their most recent meeting on 17 September.
The bank’s Monetary Policy Committee (MPC) voted to keep the base rate at 3.75%, with the motion passing by six votes to three as ratesetters remained in “wait-and-see” mode.
The hold was widely predicted by economists despite other central banks, like the European Central Bank (ECB) and the United States’ Federal Reserve, choosing to hike interest rates.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, as inflation is now growing faster than expected – rising to 3.1% in the year to August – analysts say the likelihood of a rate hike by the MPC is increasing.
Latest Videos FromMoneyWeek
How is inflation influencing interest rates?
The MPC uses economic data to help inform its interest rates decisions.
One of the most important economic metrics used by the MPC is the rate of inflation. This is because the Bank of England has a mandate to keep price growth under control.
The Bank’s inflation target, like that of most western central banks, is 2%, which economic consensus says is a healthy level of inflation in an economy that stimulates spending while keeping prices under control.
The main way the central bank works to achieve this goal is by increasing or decreasing interest rates.
Broadly speaking, when inflation is too high, the MPC will raise interest rates, and when it is too low it will lower them.
These are not the only two reasons why interest rates are moved, though. For example, rates might be lowered if economic growth is too slow, to help boost the economy.
Inflation is currently above the 2% target. The latest official inflation figures showed the Consumer Prices Index (CPI) rose by 3.1% in the 12 months to August, up from 2.9% in the year to July.
The rise was widely forecast and marks the start of what is expected to be a period of accelerating inflation for at least the remainder of 2026 as the UK contends with the economic impact of the Iran war.
With inflation set to remain above 2% for the rest of the year, and possibly next year too, it is incredibly unlikely that the Bank of England will decide the economic environment is right for an interest rate cut.
Inflation being above forecasts makes the case of an interest rate hike higher as the MPC may decide that the inflationary outlook justifies a period of higher interest rates.
The rest of the economic background
Inflation is not the only data the MPC uses to make base rate decisions. Another key metric is the state of the labour market.
A softer labour market with higher unemployment and poor wage growth is a disinflationary pressure in the economy, while strong wage growth and full employment drives up inflation.
The latest set of labour market data, published on 15 September, showed unemployment held at 4.9% in the three months to July for the fourth month in a row.
At the same time, regular wage growth was at a near-six-year low. Regular earnings held at 3.5% in the three months to July, rising to 3.9% when including bonuses.
This was led by the public sector, where regular wages grew by 6.3% in the three months to June while private sector regular earnings grew by just 2.9% in the same period.
Meanwhile, the UK economy grew by 0.4% in the month to July, up from 0.3% growth in the month prior.
Will interest rates fall in 2026?
Between August 2024 and December 2025, the Bank of England cut interest rates six times – roughly once a quarter, and each time by 0.25 percentage points.
That cutting trend brought the base rate down from a recent high of 5.25% to 3.75% in December 2025.
At the start of 2026, most economists believed the MPC would continue cutting rates at this roughly quarterly cadence before reaching a neutral monetary policy footing, potentially at around 3.25%.
However, after the Iran war started on 28 February, the MPC put rates on ice at 3.75%, keeping them there for all six meetings so far this year.
With the Bank of England’s central forecast showing inflation is expected to peak at 3.75% in the final quarter of 2026, and 4% at the start of 2027, most analysts believe there is little chance of rates being cut any time soon.
Economists instead believe the MPC will likely keep rates at 3.75% for the foreseeable future, with a growing sense that a hike to 4% could happen before the end of 2026.
Pressure to hike rates has been growing within the MPC. Just one member voted to raise rates in April, rising to two members in June and three in July and September.
The three members calling for a rate hike are external MPC members Catherine L Mann and Megan Greene, and the Bank’s chief economist Huw Pill.
They are voting to hike rates as they believe that raising interest rates now will do a better job of protecting the UK from inflation if the inflationary shock is worse than expected.
They said the risk of moving interest rates too late would be worse than the potential economic hit from hiking them too early.
Despite inflation rising faster than the Bank of England’s forecast, those who want to hike rates are still a minority in the MPC, with no new members joining the hawkish cohort at September’s meeting.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “As expected, the MPC left Bank Rate unchanged at 3.75% on 17 September.
“The decision, however, signalled a change in direction by the MPC. A more resilient economy combined with material upside risks building around the inflation outlook saw the MPC deliver a more hawkish tone on the policy outlook.
“The stage is set for rate hikes in the coming months – but a change in Bank Rate isn’t a done deal. Much depends on the path of energy prices from here and how second-round effects track in the coming months,” he added.
Energy prices in particular are being watched closely by the MPC, as predictions by EDF energy and Bloomberg economics say the Ofgem energy price cap could rise by around 25% in the first three months of 2027, pushing energy bills up to £2,150 a year.
However, while some members of the MPC want to hike rates, David Rees, head of global economics at Schroders has said that higher interest rates would not be the right tool at the moment.
He said: “The Bank was right to hold rates [on 17 September]. The markets may be building a case for an autumn hike, particularly if other central banks are tightening, but monetary policy should be guided by the fundamentals of the UK economy rather than global optics.
"Domestically generated inflation is contained, wage growth is decelerating and unemployment near 5% points to meaningful slack in the labour market. This is not an economy crying out for higher rates.”
He added that fiscal policy is the bigger risk to the economy, not monetary policy.
Rees said: “October’s Budget will be crucial. A spending splurge could revive domestic price pressures and bring forward rate hikes, but the strain already visible in gilt markets should make an inflationary fiscal expansion less likely. For now, the Bank has room to look through a temporary energy-led rise in headline inflation."
