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The Bank of England kept its Bank Rate unchanged at 3.75% on Thursday, even as inflation moved well above the central bank’s 2% target. Policymakers nevertheless warned that a rate increase was becoming increasingly likely.

The Monetary Policy Committee voted 6 to 3 to maintain the existing rate. The three dissenting members supported a 25 basis point increase, which would have lifted the Bank Rate to 4%.

Markets had assigned a 76% probability to an unchanged rate on Thursday, according to LSEG data. Even so, investors widely anticipate an increase of at least 25 basis points when the committee next meets in November.

The decision puts the Bank of England on a different course from several other major central banks. The U.S. Federal Reserve announced a quarter point increase on Wednesday, its first hike since 2023.

The European Central Bank last week delivered its second rate increase this year after raising rates in June for the first time in three years. The Bank of Japan was expected to increase its key interest rate at the end of its two day meeting on Friday.

Bank of England Governor Andrew Bailey said global energy pressures had not yet fully passed through to domestic prices and wages. “So far, higher global energy costs have had a limited effect on price and wage setting in the U.K.,” Bailey said.

“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 three committee members who favored an immediate increase cited uncertainty surrounding the Iran war and the need to move before its potential economic consequences became more severe. Their concerns centered on inflation risks and the possibility that price pressures could become entrenched.

Catherine L Mann, an MPC member and former global chief economist at Citibank, said inflation risks had increased since July, when she also voted for a hike. She noted that energy prices had risen well above the baseline in the Bank of England’s July Report.

The central bank’s short term forecast projected consumer price inflation above 4% in early 2027. Mann said: “Raising [the] Bank Rate is a better risk-management strategy when faced with uncertainty about inflation dynamics and second-round effects. Doing so avoids a worse outcome whereby inflation becomes embedded, which requires even tighter policy later.”

Megan Greene also broke with the majority. She pointed to uncertainty over the second round effects of the Iran war, supply constraints related to artificial intelligence and the El Niño climate event as possible sources of inflationary pressure.

Huw Pill, the third member supporting tighter policy, said an increase would have delivered a “clear signal of the MPC’s commitment to achieving its price stability mandate amidst the fog of geopolitical conflict and data noise.” He argued that acting decisively could help prevent inflationary pressure from becoming ingrained.

The Bank of England has not adjusted rates since December, when it approved a 25 basis point cut. Data released Wednesday showed U.K. inflation rose to 3.1% in August, moving above 3% for the first time since March.

The Office for National Statistics said rising motor fuel costs were largely responsible for the inflation increase. Those costs surged 23% from a year earlier, adding pressure in a country that remains particularly exposed to external energy shocks as a net energy importer.

Concerns about global inflation, political instability and U.K. fiscal policy have weighed on British government bonds this year. Britain had the highest borrowing costs in the G7, while yields on long dated 20 year and 30 year gilts approached 6%.

Gilt yields fell immediately after the rate decision. The benchmark 10 year U.K. government bond yield declined 4 basis points to 5.2473%, while the 30 year gilt yield dropped about 7 basis points to 5.7932%.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said the central bank was “biding its time.” He said the labor market continued to soften, while core and services inflation had remained relatively resilient since the Middle East conflict began.

Neil Birrell, chief investment officer at Premier Miton, said the Bank appeared more relaxed about inflation risks than its international counterparts. With markets expecting several increases through the end of the year and into the middle of next year, he said gilts could be vulnerable to a move in the opposite direction.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.