• Bank of England keeps Bank Rate unchanged at 3.75% in a 6-3 vote, with three policymakers favoring a hike and none backing a cut.
  • Inflation expected to peak at 3.2% in Q4 before returning to target in early 2028, but could reach 4.5% if oil stays above $100.
  • Policymakers signal rate cuts remain possible if inflation risks ease, but the hawkish split underscores uncertainty.

The Bank of England held its key interest rate steady at 3.75% on Thursday, defying expectations of a more dovish tilt as three members of the Monetary Policy Committee voted for a hike. The 6-3 split, with no votes for a cut, marked a hawkish surprise for markets that had priced in a greater chance of easing later this year.

The central bank’s updated quarterly forecasts painted a cautious picture: inflation is projected to peak at 3.2% in the fourth quarter before gradually easing back to the 2% target in early 2028. But the BOE warned that if oil prices remain above $100 a barrel, inflation could spike to 4.5%, prolonging the squeeze on households and businesses.

“The path of inflation remains highly uncertain, particularly given geopolitical risks and energy price volatility,” Governor Andrew Bailey said at a press conference. He reiterated that the committee is prepared to adjust policy in either direction as data dictates, but stressed that “we are not yet at the point where we can declare victory over inflation.”

The decision comes as the UK economy faces a delicate balancing act. Services inflation has proved stickier than hoped, while wage growth remains elevated. Yet growth is fragile, and further tightening could tip the economy into recession. The BOE’s forward guidance was notably conditional: “If inflation risks materialize, further tightening may be required; if they ease, scope for rate cuts will open up.”

Market reaction was muted but tilted toward higher short-term rate expectations. The pound edged up against the dollar, while interest rate futures pared bets on a May cut. Analysts said the vote breakdown underscored a divided committee, with hawks worried about second-round effects from energy costs.

“The three dissenters highlight that the battle against inflation is not over,” said James Spence, an economist at a London-based consultancy. “But the majority view is that holding steady is the right course while waiting for more clarity on energy and wage dynamics.”

The BOE’s stance aligns with other major central banks, including the Federal Reserve and European Central Bank, which have also paused amid persistent inflation. However, the UK’s exposure to energy price shocks and its tight labor market make it particularly vulnerable to a renewed price surge.

Correction: An earlier version of this article misstated the inflation peak timing. The BOE expects inflation to peak in Q4, not Q3. The article has been updated.