Bank of England holds rates for sixth time, while US Fed turns hawkish

The Bank of England held its benchmark interest rate for a sixth consecutive meeting on Thursday, while the US Federal Reserve raised rates a day earlier, highlighting a widening divergence in monetary policy as both economies face persistent inflation pressures.

The Bank of England’s Monetary Policy Committee voted 6–3 to keep the Bank Rate at 3.75 percent at its September 16 meeting, in line with market expectations. Three members again backed a 25-basis-point increase to four percent, matching the split at the July meeting.

The MPC said prolonged conflict in the Middle East had pushed crude and refined energy prices higher and increased market volatility, contributing to a rise in UK consumer price inflation to 3.1 percent in August, above the bank’s two percent target.

The committee said monetary policy must ensure inflation returns sustainably to target while taking account of the scale and duration of the energy shock. It said there was so far limited evidence of significant second-round effects on wages and prices, although the risk could increase if higher energy costs persist.

The MPC also unanimously agreed to reduce its stock of government bond purchases to zero through a multi-year programme. It will unwind its holdings at an average annual pace of £46 billion through 2034.

The decision came a day after the Federal Open Market Committee raised its target range for the federal funds rate by 25 basis points to 3.75 percent – 4.00 percent, its first rate increase since July 2023.

The Fed said inflation remained elevated and that the rate increase would support a “timelier return” to its two percent target.

The US central bank said economic activity had continued to expand at a solid pace, supported by resilient domestic spending, strong productivity growth and robust capital investment. It also said job gains had kept pace with the workforce and unemployment had changed little.

The different policy decisions reflect contrasting economic conditions and the risks confronting the two central banks.

In Britain, policymakers are balancing persistent inflation against weaker economic momentum and a softer labour market. The BoE warned that inflation could rise to around four percent in early 2027 as higher energy prices pass through to households and businesses.

Governor Andrew Bailey has also warned that prolonged energy-market volatility could require tighter monetary policy, leaving the prospect of further rate increases open if inflation pressures intensify.

The Fed, meanwhile, has moved back towards tighter monetary policy despite signs that inflation remains above its target. The US economy’s resilience has given policymakers greater room to prioritise price stability.

The divergence has implications beyond the two economies, particularly for global currencies, bonds and capital flows.

Higher US interest rates can increase the relative attractiveness of dollar-denominated assets, potentially supporting the dollar and raising the cost of dollar funding for emerging and frontier markets. Differences in monetary policy expectations can also affect bond yields, exchange rates and the direction of international capital.

Sterling weakened after the BoE decision, while UK government bond yields also moved lower as investors weighed the rate hold against the central bank’s warning about renewed inflation risks.

The two decisions underscore a more fragmented global monetary policy landscape. The Fed has resumed rate increases, while the BoE is holding rates but remains alert to the possibility that persistent energy-driven inflation could force it to tighten policy.

Markets will now focus on incoming inflation, labour-market and growth data for clues about how long the policy divergence between the two central banks will persist.