Bank of England reveals crucial interest rate decision after inflation climbs again – what it means for your money

THE Bank of England has voted to hold interest rates at 3.75% as soaring inflation continues to pile pressure onto the economy. The Bank’s Monetary Policy Committee (MPC) voted 6-3 to hold interest rates despite the conflict in the Middle East continuing to drive up inflation. Inflation is currently sat at 3.1% after inching up from 2.9% in the previous month. The Bank estimates that it will continue to rise this year to around 3.75% by the end of 2026 and peak at around 4% by the start of 2027. Sign up for the Money newsletter Thank you! Governor of the Bank of England, Andrew Bailey, said: “So far higher global energy costs have had a limited effect on price and wage setting in the UK. “But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2% target.” The Bank said the conflict in the Middle East has contributed to further increases in crude and refined energy prices since the previous meeting. Prices remain more volatile and higher than pre-conflict. It added that increases in oil, gas and refined product prices since the start of the conflict are already having a direct impact on inflation in major economies. Markets now expect at least four base rate increases, to 4.75%, next year. Most read in Money Economists are forecasting that the cost-of-living will rise further, with households bracing for another increase in their energy bills next month. Energy bills are set to rise from £1,663 to £1,723 a year – an increase of around £60. This is expected to increase inflation, which could prompt the Bank to raise interest rates in the coming months. Thomas Pugh, chief economist at RSM UK, said: “The rise in inflation in August is just the start of a new upward trend as higher energy, food and memory chip prices continue to make their way through supply chains. “We now see inflation peaking at almost 4% in early 2027, before gradually dropping back to 2% in 2028.” Meanwhile, diesel prices are soaring towards £2 a litre, with the cost of the fuel now just 5p below the all-time high of 199p a litre seen in 2022. What it means for your money Homeowners who are locked into a fixed-rate mortgage deal won’t be affected by today’s news. Those who are on a standard variable or tracker deal, which are more closely linked to the base rate, won’t see their bills rise. But more than 1.8million borrowers will see their fixed-rate mortgage deal expire this year, according to trade body UK Finance. Many of these households will be coming to the end of a five year deal they were able to secure at record lows before lenders began to hike rates in 2022. Higher interest rates also make it more expensive to borrow money on a credit card or personal loan. Jason Hollands, managing director of investment platform Bestinvest, said: “Unless there is a quick resolution to the conflict in the Middle East, interest rates are more likely to rise than fall over the coming months, so households need to consider the financial implications. “Expensive credit-card debt should be prioritised for repayment if possible.” But there is good news for savers. Higher interest rates mean banks are more likely to increase the return they offer on your cash, so you earn more in interest. Jason said: “Those holding significant cash savings should benefit from decent nominal returns.” Meanwhile, retirees can get a bumper rate on an annuity thanks to volatility in the gilt market. Annuities are products you can buy with your pension pot that give you a guaranteed income in retirement. Gilts are bonds issued by the government to borrow money from investors, which it promises to pay back with interest. Ten year gilt yields are currently trading at around 5.31%, which is close to their 19-year high. Gilts have a direct impact on annuity rates as insurance companies invest your pension lump sum into government bonds to guarantee your retirement income. As a result, the income you could get is at a 10 year high. Comment now