NEWS: BOE HOLDS BENCHMARK RATE AT 3.75% (YET AGAIN)
Updated: Aug 30
THE BOE HOLDS COURSE AT 3.75% BUT THE MUTINY CONTINUES TO GROW 6-3 VOTE
On 30/07/2026 the Bank of England (BOE) held its benchmark base rate at 3.75% with a 6-3 vote from its Monetary Policy Committee (MCP). The dissent which began 29/04/2026 grew with Catherine Mann joining the previous 2 mutineers arguing for 1/4 point increase in rates to 4%. Together, the dissenters expressed fear over persistent inflation and the second-round effects from conflict in the Middle East.
MARKET REACTION:
GBP/USD: The pound fell against the dollar trading weaker at $1.3380 before stabilising at around $1.3419.
Gilt Yields: The 2 year Gilt Yield dropped 11-13 basis points to 4.33%-4.34% while the 10 year remained relatively unchanged at 5.04% holding the 2 month high since PM Andrew Burnham seized power.
Equities: London's FTSE dropped a marginal 0.17% at 10,890 points.
Traders: Cut bets on a move at the next meeting in September 2026 seeing just a 35% chance of a hike.
Next Rate Decision: 17th September 2026.
The BoE MCP meets 8 times per year to consider the benchmark base rate. Thereafter, it publishes its MCP minutes. Those arising from the MCP meeting 30/07/2026 can be viewed by clicking here.
INCREASED DISSENT
Chief Economist Huw Pill April 2026's lone dissenter and Megan Greene whom joined the dissent June 2026 were joined by Catherine Mann in recommending that the base rate be increased 0.25% to 4%. Pill repeated that a hike would cut through the "noise" in commodity markets, Mann argued that a proactive hike may reduce the probability 'second-round effects' would set in, while Greene pointed to the spike in Bond Yields. In their view, the second-round effects of higher energy costs, increased business expenses and worker wage demands could create a wage price spiral while the fallout from the ongoing USA Israel vs Iran conflict added further complications.
The conflict in the middle east in now entering its 6th month with little sign that the intermittent negotiations will yield any lasting peace (we told you). While inflation is running below levels that the BoE had predicted in spring, price growth is expected to accelerate in the coming months reflecting a July 2026 increase in household energy bills and fuel costs. UK Inflation was 2.6% June 2026, 0.4% points lower than the BOE forecast in April 2026 and 0.6% above the BOE's stated target of 2%. Despite this, the BoE's central forecast expects unemployment to rise to 5.3% in 2027 up from the current 4.9%. This would be the highest level since 2015 implying it expects a further 140'000 people to be taken out of work within 1 year.
THE OFFICIAL LINE
War and Energy powered the calculations. The BoE restored the central inflation forecast it had rejected back in April 2026 but also published 2 further "mild" and "adverse" scenarios showing the different paths for oil and gas costs. The central projection in play at the July 2026 MCP meeting was based on a 15-day snapshot of energy prices throughout July 2026. This pointed to UK inflation peeking at 3.2% year end, up from the current 2.6%. The more pessimistic scenario which included oil prices climbing >$100 a barrel and remaining elevated with gas 60% higher, predicted that inflation could jump to a high of 4.5% in the second quarter of 2027. In all 3 scenarios GDP growth hovers around 1% throughout 2026 and 2027 with no relief until 2028.
Despite the fact that 1% GDP growth is well within the margin of error, worries over the second-round effects from inflation appear to have rescinded with the 6 MCP members voting for a hold showing little to no indication of changing their minds. Weak demand for workers was seen to be easing domestic price pressures and tightening financial conditions, in short; the BOE saw a silver line to the cloud of rising unemployment. Taking all the risks into account, higher energy costs, inflation and its second-round effects, the 6 holding MPC members judged that the risk of strong inflationary pressures was greater than the risk of weak. In their view, holding would allow time to observe further evidence and keep their options open.
"There is little yet to suggest that higher energy prices are becoming embedded in broad-based inflationary pressures in the UK economy, although we cannot draw too much comfort from that at this stage. [Higher Inflation] needs to be considered alongside whether the underlying disinflation in the domestic economy will continue." (Andrew Bailey - Chief Governor of the Bank of England).
MARKET EXPECTATIONS
ING Think:
"The committee is turning more dovish as confidence grows that higher energy prices won't spill into broader inflation - even if there was one extra vote for a rate hike at the July meeting. We expect a prolonged hold from the Bank [of England] before rate cuts resume next spring."
You can read their original article by clicking here.
Bloomberg Economics:
“The takeaway from the communications is that the core of the committee still seems some way off of voting for a hike. Potential triggers that could change their thinking remain the path of the conflict, and of energy prices, and evidence that second round effects are crystallizing.”
You can read their original article by clicking here.
