Bank of England Holds Rate at 3.75%, Plans to Unwind Gilt Holdings

The Bank of England’s Monetary Policy Committee voted 6–3 to maintain Bank Rate at 3.75% at its meeting ending on 16 September 2026, with three members preferring an increase to 4%, and voted unanimously to reduce the stock of gilts held for monetary policy purposes to zero under a multi-year plan running to September 2034. The decisions were set out in the September 2026 Monetary Policy Summary and Minutes, published on 17 September 2026.

The six members voting to hold were Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor. Megan Greene, Catherine L Mann and Huw Pill voted to increase Bank Rate by 0.25 percentage points, to 4%. The Committee judged it appropriate to maintain Bank Rate at this meeting and stated that it stands ready to act as necessary to ensure CPI inflation meets the 2% target in the medium term.

Twelve-month CPI inflation was 3.1% in August, triggering the exchange of open letters between the Governor and the Chancellor of the Exchequer that was published alongside the minutes. Around 0.7 percentage points of the 1.1 percentage point overshoot relative to the 2% target was driven by the direct effects of energy prices, mostly motor fuels. Services inflation was 3.4% in August, unchanged from July and down from 4.5% in March. The Committee judged that risks to the inflation outlook were tilted to the upside, more so than at the time of the July Monetary Policy Report, with protracted conflict in the Middle East the dominant source of uncertainty. There had been little evidence so far of material second-round effects in price and wage-setting, the summary stated.

Spot prices of Brent crude and UK wholesale gas had risen 36% and 78% respectively since the period leading up to the July Report. At close of business on 14 September, the Brent oil price had reached $106 per barrel and the UK wholesale gas price 207 pence per therm. Based on energy prices at that date, the minutes stated, CPI inflation was expected to increase to around 3¾% in 2026 Q4, compared with 3.2% at the time of the July Report, and to reach slightly above 4% in 2027 Q1. Ofgem’s headline energy price cap for October to December would be increased to £1,723, somewhat higher than expected at the July Report, and the cap was expected to rise substantially further in 2027 Q1, all else equal.

UK GDP increased 0.4% in 2026 Q2, 0.1 percentage points higher than expected in the July Report, and monthly GDP rose 0.4% in July, with a strong contribution from business-to-business services. A Bank staff update implied GDP growth of 0.4% in 2026 Q3, against 0.1% projected at the time of the July Report. The unemployment rate was estimated at 4.9% in the three months to July, unchanged since the three months to April, although an operational error had temporarily reduced LFS achieved sample sizes in May and June, leading to an increased use of imputation for those months. Annual growth in private sector regular Average Weekly Earnings was 2.9% in the three months to July, down from 3.3% at the start of the year; other indicators, including pay settlements and timelier HMRC data, collectively suggested underlying private sector wage growth of around 3½%. DMP respondents expected one-year-ahead wage growth of 3.4%, stable since before the conflict, and the Bank’s Agents reported that annual food inflation was now expected to be around 4% at the end of 2026, compared with previous expectations of 6-7% in April.

Nearly all respondents to the September Market Participants Survey, which closed on 4 September, had expected Bank Rate to remain unchanged at the meeting, and median expectations had implied a prolonged period of unchanged Bank Rate. By contrast, the UK short-term interest rate curve was upward sloping and had risen further since the survey window closed, peaking at around 4.9% by end-2027; elevated risk premia were thought to remain a material contributor to that slope. There had continued to be full and fast pass-through from increases in short-term overnight index swap rates to key lending rates, and the quoted rate on two-year fixed-rate mortgages was around 95 basis points higher than prior to the conflict.

Multi-Year Gilt Unwind

The unanimous second vote commits the Bank to reducing the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, to zero. On 16 September, the stock of gilts held for monetary policy purposes in the Asset Purchase Facility stood at £488 billion, down from a peak of £895 billion in February 2022. Over the previous 12 months the stock had been reduced by £70 billion, of which £21 billion had been through gilt sales.

Under the plan, the Bank, in consultation with HM Treasury, will set aside and retain £120 billion of the longest-dated gilts in the APF to back current and future banknote issuance. Of the remaining £368 billion, £222 billion will be allowed to mature passively and £146 billion will be sold. Annual sales of £20 billion alongside maturing gilts correspond to an average annual reduction of £46 billion until September 2034, when quantitative tightening is expected to be complete.

The fixed pace of unwind would be amended only under two circumstances: if the MPC judged that potential movements in Bank Rate alone were insufficient to meet the inflation target, or if markets were judged by the Bank to be very distressed. The Financial Policy Committee would have a role in the second circumstance through its assessment of financial stability, and it had been briefed on the MPC’s deliberations.

The minutes state that UK term premia on long-term government bonds had risen an estimated 200 basis points since QT commenced in February 2022, with Bank staff estimates suggesting QT had accounted for around 20-30 basis points of that increase. Over the course of the year, the Bank had engaged HM Treasury and the Debt Management Office on a model under which the MPC’s decision could be implemented through APF sales to the Government, which remained subject to a final decision to proceed. Progress would be reviewed before April 2027, the Bank would announce the operational details through which it would implement the plan by April 2027, and Bank APF auctions would pause in the meantime.

Members’ Stated Rationales

Within the majority, Swati Dhingra and Alan Taylor placed particular weight on the role of slack in moderating inflation, evidence of restrained pass-through of costs to prices, and the restrictive level of Bank Rate. Taylor wrote that “Bank Rate remains materially above my estimate of neutral at 3%,” and said he favoured holding while monitoring closely whether expectations, wages, prices and margins begin to react. Bailey said holding was appropriate at this meeting, but added that if the Middle East conflict persists for an extended period and the risk of second-round effects emerging increases, policy may have to tighten.

The three dissenters argued that a projected surge in inflation would peak in early 2027, just as wage settlements were agreed, that slack in the labour market and economy appeared to have peaked already, and that a proactive increase in Bank Rate would help anchor inflation expectations. They also cited research finding that setting policy as if there were stronger second-round effects, and course correcting if needed, would prove less costly to economic activity than the reverse. Mann described a rise as the better risk-management strategy, while Greene said waiting for definitive evidence of second-round effects before acting would leave policy behind the curve. Pill wrote that a 25-basis-point increase “sends a clear signal of the MPC’s commitment to achieving its price stability mandate.”

The minutes of the Committee’s meeting ending on 4 November will be published on 5 November 2026.