UK's BoE Holds at 3.75% as Fed Lifts to 4% – Comparing the Rationales

Despite rising UK inflation and a US rate increase, the Bank of England is keeping its benchmark rate at 3.75%. The difference in policy stems from the source of the price pressures.

The Bank of England's Monetary Policy Committee decided by a 6–3 vote to maintain the rate, while three members favoured an immediate rise. The previous day, the Federal Reserve had lifted its rate to 4%.

Why the Fed Raised Rates While the BoE Stayed Put

On 16 September the Federal Reserve increased its key rate by 25 basis points to between 3.75% and 4%. That move marked the first US rate hike since 2023 and occurred one day ahead of the BoE’s decision.

The two central banks face the same trigger: energy costs have jumped after supply disruptions linked to the Middle East conflict. Brent crude is now above $100 a barrel, pushing UK inflation to 3.1% in August from 2.9% in July.

Governor Andrew Bailey argues that an oil-driven price shock cannot be addressed directly by interest rates. He also says there is scant proof that rising energy costs are feeding into wages. In contrast, the US central bank, with a tighter labour market and its own inflation worries, decided to move rather than wait.

that the UK faces a lower chance of a wage spiral than it did in 2022. This allows the BoE greater leeway to delay a rate rise.

Why Households Are Already Bearing the Cost

UK households are already experiencing higher costs before any official rate increase. The typical five-year mortgage rate has risen to 5.87%, the highest since November 2023. Lenders are already incorporating the possibility of future tightening into their rates.

This situation forces the BoE to weigh two dangers: acting too quickly could strain a fragile economy, while delaying could allow the energy shock to become an entrenched wage-price spiral.

Three MPC members already favour a rise, and the Fed has just taken the opposite action. If energy costs remain high, this year may see further moves beyond 3.75%.