Bank of England holds UK interest rate steady at 3.75% — but policymakers see upside inflation risk

The Bank of England has left its key interest rate unchanged at 3.75%, in line with economists' expectations.

The U.K. central bank's rates-setting Monetary Policy Committee voted by a 6-3 split to keep the benchmark rate, officially known as Bank Rate, unchanged.

Committee members Megan Greene, Huw Pill and Catherine Mann were the dissenting voices, voting for a 25 basis point hike.

The BoE said all members agreed that risks to the paths of energy prices remained skewed to the upside.

A hold had been widely anticipated after headline U.K. inflation fell to 2.6% in June, a 15-month low.

But Greene said inflation has remained above target for about five years, adding that additional supply risks, including a second energy chokepoint in the Red Sea and AI-related hardware supply constraints, are now weighing on markets.

"A proactive hike in Bank Rate may reduce the probability that second-round effects set in," Greene said.

Pill warned that "profound uncertainty surrounding the energy price outlook is likely to be prolonged and of unknown duration, rendering efforts to fine-tune the economy with monetary policy hazardous."

"As a result, it is appropriate to raise Bank Rate now, thereby cutting through noise in commodity and asset price developments to offer a clear and unambiguous signal of our willingness and ability to address upside risks to inflation stemming from events in the Gulf," he added. "This would place us in the best position to manage risks to the inflation target as they emerge."

The pound was up 0.08% against the dollar at $1.3376 following the decision.

Felix Feather, economist at Aberdeen, said the increase in dissenters from two to three shows concerns over inflation risks are now spreading within the committee — raising the likelihood of rate hikes if inflation doesn't ease further.

"This was a slightly more hawkish Bank of England hold than expected," Feather said.

Simon Dangoor, deputy chief investment officer of fixed income and head of fixed income macro investing at Goldman Sachs Asset Management, said the central bank is happy to sit tight "for now" as encouraging inflation data helps lessen the need for immediate action.

"A persistent Middle East shock could change the calculus, however, keeping a September meeting live."