Bank of England holds rates at 3.75% but signals hikes if energy costs persist

The Bank of England kept its main interest rate at 3.75% for a sixth consecutive meeting but signalled that it could raise borrowing costs if energy prices stay elevated.

Six of the Monetary Policy Committee’s nine members voted to hold the rate. Three, including chief economist Huw Pill, supported an increase to 4%.

Inflation forecast moves higher

The bank now expects inflation to be slightly above 4% at the start of next year. It also warned that the January cap on household gas and electricity bills is expected to rise substantially further than previously forecast.

Governor Andrew Bailey said the direct effect of higher energy prices was clear, while officials were still assessing how far those costs would spread through the wider economy. He said lower rates would require an end to the conflict in the Middle East and energy prices returning to their earlier levels.

The bank raised its growth forecast for the UK economy between July and September from 0.1% to 0.4%. Its forecast for food-price inflation at the end of the year was lowered to 4%, from an earlier estimate of 6-7%.

Mortgage costs and bond sales

Major lenders have already raised the cost of new fixed-rate mortgages amid expectations of further rate increases. Moneyfacts said the average two-year fixed residential rate was 5.77%, while the five-year rate was 5.83%.

The bank also changed its programme for reducing its government-bond holdings. Instead of larger annual sales, it will sell smaller amounts over eight years; the portfolio currently totals £488bn.

Following the announcement, the yield on 30-year UK government bonds fell from 5.86% to 5.75%, while the 10-year yield dropped from 5.31% to 5.22%. The bank said the plan had been under discussion for about a year and was not prompted by the recent rise in long-term government borrowing costs.