- The Bank has held its policy rate at 3.75%, but three of nine policymakers voted for an immediate increase to 4%.
- It now expects inflation to exceed 4% in early 2027, largely because wholesale oil and gas prices have risen sharply.
- For the energy transition, the decision reinforces a difficult dual reality: higher financing costs threaten investment, while volatile imported fuel prices strengthen the case for domestic clean power.
The Bank of England has kept interest rates unchanged while delivering its clearest warning yet that a prolonged Middle East energy shock could force borrowing costs higher.
The Monetary Policy Committee (MPC) voted six to three to maintain Bank Rate at 3.75%, with Megan Greene, Catherine Mann and chief economist Huw Pill favouring a quarter-point increase. More significantly, several members of the majority signalled that they could support tightening if higher energy costs begin feeding into wages and wider prices.
According to the Bank’s September meeting minutes, Brent crude and UK wholesale gas prices had risen by 36% and 78% respectively since its July forecast, reaching $106/barrel and 207p/therm on 14 September.
Those movements have materially altered the inflation outlook. Consumer price inflation, which reached 3.1% in August, is now expected to climb to about 3.75% in the fourth quarter and slightly above 4% in early 2027. In July, the Bank had forecast a peak of 3.2%.
Governor Andrew Bailey said policy may have to tighten if the conflict persists and the danger of second-round inflation increases. In a subsequent broadcast interview, he cautioned that pass-through into wider prices had so far been “quite subdued”, but added: “It is early days.”
The immediate pressure on households will come through transport costs and energy bills. Ofgem’s headline price cap is due to increase to £1,723 in October and the Bank expects a substantially larger rise in the first quarter of 2027 if wholesale prices remain elevated.
Energy security financing
The MPC is confronting a supply shock that interest rates cannot directly resolve. Higher rates will not produce additional gas or bring down oil prices; they can only prevent the initial shock from becoming embedded in expectations, wage settlements and companies’ pricing decisions.
That leaves policymakers balancing inflation risk against an already restrictive financial environment. Private sector regular wage growth has slowed to 2.9%, unemployment is estimated at 4.9% and the labour market remains soft. Yet economic activity has proved more resilient than forecast, with the Bank raising its estimate for third-quarter growth from 0.1% to 0.4%.
Financial markets had priced the equivalent of almost four quarter-point increases over the following year, although Bailey stressed that the MPC had not discussed this.
The consequences extend directly into energy investment. Bailey said quoted two-year mortgage rates had risen by nearly 1% since the conflict began; corporate borrowing and project finance costs have moved in the same direction. Capital-intensive wind, solar, storage and network projects are particularly exposed because much of their lifetime cost is incurred upfront.
The Bank offered some relief at the longer end of the financing curve by overhauling quantitative tightening. It will unwind £368 billion of gilts held for monetary policy purposes by 2034, using £20 billion of annual sales alongside maturities, while retaining £120 billion of long-dated bonds to back banknotes. Active sales are being paused for six months while the implementation arrangements are completed.
For energy businesses, the key message is that energy security and monetary stability have become inseparable.
A durable fall in fossil fuel prices could remove the case for tighter policy. Continued volatility would simultaneously make renewable generation more strategically valuable and more expensive to finance – the central investment tension facing the UK transition.
