The Bank of England held interest rates at 3.75% on Thursday but shifted its tone toward a hike if the Iran war keeps pushing up energy costs. The central bank also lifted its inflation forecast above 4% for early 2027 and rewrote its plan for selling off its gilt holdings, pausing long-dated sales for six months.
The Bank of England's Monetary Policy Committee voted 6-3 to hold interest rates at 3.75% on Thursday, matching the median forecast in a Reuters poll, but warned it may need to raise borrowing costs if the Iran war keeps driving up energy prices.
Meanwhile, the pound fell by around half a cent against the dollar after the decision, while British government bond yields dropped sharply.
Governor Andrew Bailey said the key question — whether the energy price surge feeds through to broader inflation — remains unanswered. According to Reuters: "That feed-through has been quite subdued, but it is early days," he told broadcasters.
Inflation seen breaching 4% in early 2027
The BoE now expects inflation could reach slightly over 4% in early 2027, more than double its 2% target. That is up from its previous forecast of 3.2% peak inflation in late 2026. Inflation stood at 3.1% in August and has topped the BoE's target in all but three months over the past five years. The central bank also raised its estimate of third-quarter growth to 0.4% from a prior 0.1%.
But three MPC members again voted for a rate hike — Chief Economist Huw Pill, Megan Greene and Catherine Mann — and this time Bailey and his deputies signaled they too could back one.
BoE rewrites plan to unwind its gilt stockpile
Alongside the rate hold, the MPC voted 9-0 to pause active gilt sales for six months and halt sales of long-dated bonds entirely. It is rewriting its plan to shrink the £488 billion of government debt it still holds. The bank aims to cut its gilt holdings for monetary policy purposes to zero by 2034, keeping only long-dated gilts to back banknote issuance.
Long-dated gilt prices rallied on the news, with 30-year yields on course for their biggest one-day gain since April, sliding to a three-week low. The move comes days after 30-year borrowing costs hit their highest level since 1998 amid a global bond selloff.
The pause will effectively leave the government's Debt Management Office in full control of gilt issuance to the secondary market.
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