Bank of England holds rates at 3.75%, warns on higher inflation

The Bank of England left its Bank Rate unchanged at 3.75% at its April meeting and used its Monetary Policy Report to warn that energy shocks stemming from the Iran conflict could push inflation higher.

The Monetary Policy Committee voted 8-1 to keep policy on hold, with Chief Economist Huw Pill the sole dissenter advocating a rise to 4.0%. The Bank set out a range of scenarios showing that, while a baseline sees inflation peaking modestly above current readings, a prolonged high-energy-price outcome could see much larger inflation peaks.

The report highlights the risk of material “second-round effects” — firms passing higher input costs onto consumers and workers seeking larger pay increases — which would make inflation more persistent and complicate the Bank’s remit to return CPI to 2%. Under one adverse scenario the Bank’s analysis implies a peak inflation well above the baseline path.

Officials also quantified near-term household impacts, noting a noticeable rise in mortgage repayments and upward pressure on food and utility bills; the Bank estimated average mortgage payments could rise by about £80 a month and projected food inflation to approach mid-single digits in some scenarios. These factors increase cost-of-living pressures and weigh on real incomes.

Market participants reacted by recalibrating the timing and scale of potential Bank rate moves: while the Committee held today, futures and analysts still price a significant chance of rate hikes later in the year if energy prices remain elevated or second-round effects materialize. The Bank’s next steps will depend on incoming data on wages, CPI and the persistence of the energy shock.