The Bank of England rate hold at 3.75% has been extended for the sixth consecutive time, but the Bank made clear on 17 September 2026 that borrowing costs are likely to rise if energy prices, pushed higher by the conflict in the Middle East, remain elevated. The decision was not unanimous: the Bank’s Monetary Policy Committee voted 6-3 to keep rates unchanged, with three members pushing to raise the base rate to 4%.
For most households, the Bank rate sets the floor for what banks and other lenders charge on mortgages, personal loans and credit cards, as well as what they pay on savings. Keeping it at 3.75% offers a temporary reprieve, but the Bank’s language around what comes next was deliberately cautious.
Why the Bank of England rate hold may not last
The trigger for any future move is energy. The conflict between the United States and Israel with Iran has disrupted global energy supplies, driving up petrol and diesel prices sharply. The Bank now expects inflation to rise further than it had previously forecast. Official figures published on Wednesday showed inflation had already climbed to 3.1% in August, up from 2.9% in July, keeping it well above the Bank’s 2% target, a level it has not managed to reach for nearly two years.
Bank of England governor Andrew Bailey said the longer the volatility in energy prices persists, ‘the bigger the impact it will have on inflation and the more likely it is we will need to raise [the] Bank rate to ensure that inflation falls back to our 2% target’. The Bank also warned that the price cap on household gas and electricity bills for January is ‘now expected to rise substantially further’, adding pressure on family budgets heading into winter.
On the positive side, the Bank said economic growth had been ‘more resilient’ than expected. It now predicts the economy will grow by 0.4% between July and September, a marked improvement on the 0.1% growth it had pencilled in during the summer. Food price inflation also looks set to be lower than feared: the Bank now expects food prices to rise 4% by the end of the year, compared with a previous forecast of 6-7%, providing at least some relief for shoppers ahead of Christmas.
Quantitative tightening paused and stretched over eight years
Alongside the rate decision, the Bank announced a significant change to its so-called quantitative tightening programme, the process by which it has been selling back the government bonds it accumulated during the global financial crisis and the Covid pandemic to steady the economy. Rather than continuing with its annual sale schedule, the Bank said it would pause the programme and instead sell off smaller amounts over eight years.
The scale of the operation is substantial. According to a Bank of England speech on quantitative tightening, the Asset Purchase Facility (APF) (the vehicle through which the Bank holds these bonds) has already fallen by over £400bn from a peak of £895bn to around £488bn since February 2022, when the selling programme began. The same speech set out that around £120bn of gilts should ultimately remain in the APF, no longer held for monetary policy purposes but solely to back banknotes in circulation.
The bond sales have had a measurable effect on government borrowing costs. Between the start of the quantitative tightening programme in February 2022 and late September 2026, 10-year gilt yields rose by around 450 basis points, according to the Bank of England. A basis point is one hundredth of a percentage point. Of that rise, around 200 basis points was driven by term premia (roughly, the extra return investors demand for holding longer-dated debt) with the remaining increase accounted for by higher expected rates. Higher gilt yields translate directly into higher borrowing costs for HM Treasury, making it more expensive for the government to fund public spending.
The Bank was at pains to note that discussions about changing the bond-sale plan had begun a year ago, implying the shift has nothing to do with any turbulence in current financial markets.
With inflation above target, the January energy price cap set to rise and the MPC already split, the Bank’s next scheduled rate decision will be watched closely for whether the six-strong majority for holding can survive a winter of high energy costs.
