BoE recap: A cautious stance amid rising inflation risks

Pablo Piovano FXStreet

The Bank of England left Bank Rate unchanged at 3.75% but delivered a distinctly hawkish message as its inflation outlook deteriorated sharply. Three policymakers voted for an immediate increase to 4%, while Governor Andrew Bailey warned that a prolonged Middle East conflict and wider second-round effects could require tighter policy.

A divided MPC and policy tightening on the cards

The Monetary Policy Committee (MPC) voted 6-3 to maintain the Bank Rate at 3.75%, in line with expectations. Chief Economist Huw Pill and external members Megan Greene and Catherine Mann preferred a 25-basis-point increase to 4%, highlighting the growing concern about persistent price pressures. The MPC also voted unanimously to continue unwinding its gilt holdings.

The inflation projections were the most striking part of the decision. The BoE now expects consumer price inflation to exceed 4% in early 2027, compared with a previous forecast for a 3.2% peak in October-November 2026. Although the bank repeated that there was still little evidence of material second-round effects, it acknowledged that inflation risks were tilted to the upside relative to its July forecast.

Bailey said policy might have to tighten if the Middle East conflict persisted for an extended period and the risk of second-round effects increased. Energy prices remain the immediate concern, but the BoE is also watching how higher costs feed into wages, services and broader price-setting behaviour. At the same time, the MPC continues to take a cautious approach because inflationary pressures are not yet clearly broad-based.

The growth picture offered some relief. Third-quarter GDP growth is now expected at 0.4% (from the 0.1% projected in July), while manufacturing, consumer confidence and services have improved. The labour market remains relatively robust, although employment growth is slowing, and exports continue to face challenges related to competitiveness and trade policy.

The BoE confirmed that QT will continue at an average annual pace of £46 billion through to 2034, including £20 billion of active Gilt sales alongside maturities. Auctions will be paused until April 2027 while the central bank considers whether some Gilts could be sold to the government rather than the market. Long-dated holdings will remain in the Asset Purchase Facility (APF) to back banknotes and will be replaced as they mature.

Overall assessment

The BoE delivered a hawkish hold. It did not raise rates, but the sharp upward revision to the inflation outlook, the 6-3 vote and Bailey’s warning about possible tightening make this far more than a routine pause. The bank is still waiting for evidence of second-round effects, but the threshold for renewed rate increases has clearly moved lower if energy prices remain elevated or inflation broadens.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

Author

Pablo Piovano

FXStreet

Born and bred in Argentina, Pablo has been carrying on with his passion for FX markets and trading since his first college years.

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