The central bank's Monetary Policy Committee voted 6-3 to keep the Bank Rate at 3.75%. The three dissenters wanted to raise it by 25 basis points to 4%, arguing that acting early would be a better way to manage the risk that inflation becomes entrenched.

The decision had been widely expected: LSEG data showed markets pricing in a 76% chance that rates would be held. Attention has already shifted to the next meeting in November, where a hike of at least 25 basis points is widely anticipated.

The hold sets the Bank of England apart from other major central banks. The U.S. Federal Reserve announced a quarter-point hike on Wednesday, its first increase since 2023. Last week the European Central Bank announced its second rate rise this year, after raising rates in June for the first time in three years. The Bank of Japan is expected to raise its key interest rate at the end of its two-day meeting on Friday.

Governor Andrew Bailey said in a statement that higher global energy costs had so far had a limited effect on price and wage setting in the U.K. "But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target," he said.

The dissenters pointed to uncertainty created by the Iran war and the need to get ahead of its potential economic consequences. Catherine L. Mann, a former global chief economist at Citibank, said the upside risks to inflation had increased since July, when she also voted for a hike. She noted that the Bank's short-term inflation forecast projected the consumer price index rising above 4% in early 2027, and said raising the Bank Rate was "a better risk-management strategy when faced with uncertainty about inflation dynamics and second-round effects."

Megan Greene, who also voted to tighten, cited uncertainty over the extent of second-round effects from the Iran war, AI-related supply constraints and the El Niño climate event as sources of inflationary pressure. Huw Pill, the third dissenter, said a hike would have sent a "clear signal of the MPC's commitment to achieving its price stability mandate amidst the fog of geopolitical conflict and data noise," adding that acting decisively now would head off inflationary pressures rather than requiring them to be reversed once ingrained.

The pressure on the committee has been building. Data released Wednesday showed the U.K. inflation rate rose to 3.1% in August, its first reading above 3% since March. The Office for National Statistics said the spike was largely driven by motor fuel costs, which surged 23% year-on-year. As a net energy importer, Britain is particularly exposed to external energy shocks and is still dealing with a cost-of-living crisis brought on by post-Covid inflation and the Russia-Ukraine war's effect on natural gas supplies.

Global inflation concerns, political instability and apprehension about U.K. fiscal policy have weighed on British government bonds, known as gilts, this year. Britain has the highest borrowing costs in the G7, with yields on its long-dated 20- and 30-year gilts approaching the 6% mark.

Gilt yields fell sharply after the decision was announced. The benchmark 10-year U.K. government bond yield was down 8 basis points at 5.2169%, while 30-year gilt yields shed nearly 12 basis points to trade at 5.7415%.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note after the announcement that the bank was "biding its time." He pointed out that despite headline inflation creeping up over the summer, the labour market continues to soften while closely watched core and services inflation have both been relatively resilient since the Middle East conflict started. "So far, the UK economy has largely been insulated from the conflict, aside from higher energy bills. However, the longer the war continues, the harder it is to see that resilience holding," he said.

Neil Birrell, chief investment officer at Premier Miton, said the Bank "seems to be more relaxed on inflation risks than their international counterparts, although the markets are setting borrowing costs at present anyway." With expectations pointing to a number of hikes through the end of this year and into the middle of next, he added, the gilt market may be more susceptible to a move in the other direction.

The Bank of England has not changed rates since December, when it voted for a 25-basis-point cut.