The Bank of England has kept Bank Rate unchanged at 3.75%, choosing to wait for clearer evidence on inflation rather than tighten policy immediately.

At the meeting ending on 29 July 2026, six members of the Monetary Policy Committee voted to maintain the rate, while three supported a 0.25 percentage-point increase to 4%.

The decision reflects an increasingly difficult balance between easing domestic inflation pressures and renewed risks from higher energy prices.

Inflation Has Fallen, but Risks Remain

UK CPI inflation has declined to 2.6%, moving closer to the Bank’s 2% target and falling more than previously expected. Services inflation and food inflation have moderated, wage growth has slowed and the labour market has weakened.

Normally, these developments might strengthen the case for lower interest rates.

The complication is energy.

Oil, gas and refined fuel prices have remained elevated and volatile amid continued instability in the Middle East. The Bank expects these higher costs to push inflation upward again later in 2026, potentially taking it slightly above 3% by the end of the year.

Energy prices affect households directly through transport and utility costs, but businesses can also pass higher production and distribution expenses into the prices of goods and services.

Why Energy Prices Matter So Much

The Bank cannot control international oil or gas prices through interest rates. Instead, monetary policy focuses on preventing an external shock from turning into persistent domestic inflation.

The main concern is so-called second-round effects.

These can develop when higher energy prices influence wage demands, businesses raise prices more broadly and inflation expectations begin to change. Temporary increases can then become embedded in the economy even after the original energy shock fades.

So far, the MPC says there is little evidence that significant second-round effects have developed. Inflation expectations, wage behaviour and other indicators have remained relatively contained.

However, policymakers warn that these effects often appear with a delay.

The longer energy costs remain high, the greater the possibility that households and businesses begin adjusting their decisions around the expectation of persistently higher inflation.

Domestic Conditions Point the Other Way

While external risks are inflationary, the UK economy itself looks considerably softer.

Demand remains subdued, the labour market has loosened and financing conditions for households and businesses have tightened. These factors should reduce companies’ ability to increase prices and limit pressure on wages.

Governor Andrew Bailey’s assessment is that maintaining Bank Rate at 3.75% currently provides an appropriate balance: domestic inflation pressures continue to ease, while tighter financial conditions offer some protection against the risk that higher energy costs become more persistent.

Several MPC members who voted to hold rates argued that waiting would provide more information without removing the option of raising rates later if inflationary pressures strengthen.

Why Three Members Wanted a Hike

Not everyone on the Committee was comfortable waiting.

Megan Greene, Catherine Mann and Huw Pill voted to increase Bank Rate to 4%.

Their concern was that inflation has remained above the 2% target for a prolonged period and that continuing energy-price volatility could make businesses and households more sensitive to future price rises.

For these members, increasing rates before second-round effects become clearly visible would provide insurance against inflation becoming more deeply embedded.

Their argument is essentially about risk management: tightening too early could weaken economic activity unnecessarily, but responding too late could make inflation more difficult and costly to control.

The growing disagreement is notable. In June, only two members supported an increase; by July, three favoured higher rates.

Other Global Inflation Risks

Energy is not the only concern.

The MPC also highlighted several international developments that could create additional price pressure.

Demand for components linked to artificial intelligence infrastructure may lead to shortages and higher prices in some technology sectors. El Niño could affect agricultural output and global food prices, while trade disruptions and international tensions could create further supply-chain problems.

None of these risks is certain to materialise, but several occurring at the same time could make inflation harder to contain.

What the Decision Means for Households

Holding Bank Rate at 3.75% means there is no immediate change in the Bank’s benchmark borrowing cost.

For borrowers on fixed-rate mortgages, the impact will depend primarily on when their current deals expire and what lenders are offering when they refinance.

People with variable-rate borrowing remain more directly exposed to changes in interest rates.

Savers, meanwhile, may continue to benefit from relatively elevated deposit rates, although individual banks can adjust their offers independently.

The Bank explains that higher interest rates generally make borrowing more expensive and encourage saving, reducing demand and helping to lower inflation over time.

What Happens Next?

The next scheduled Bank Rate decision is due on 17 September 2026. Until then, policymakers will closely monitor energy markets, inflation expectations, wage growth, employment and evidence of broader price increases.

A rate increase remains possible if higher energy costs begin feeding more strongly into wages and prices. Equally, if international tensions ease and underlying inflation continues to weaken, the case for eventually resuming rate cuts could strengthen.