Bank Rate Held at 3.75% as Bank Warns Energy Costs Could Trigger Rise

Bank of England Holds Rates at 3.75% — But Mortgage Borrowers Face a New Risk of Rate Rises

The Bank of England has held Bank Rate at 3.75% for a sixth consecutive meeting, but the decision came with a much less comfortable message for mortgage borrowers: interest rates could still need to rise if higher energy costs keep inflation above target.

The Monetary Policy Committee voted by six members to three to leave Bank Rate unchanged at its September meeting. The three dissenting members wanted an immediate quarter-point increase to 4%, reflecting growing concern about the inflationary effect of higher oil, gas and other energy prices.

For mortgage borrowers, that combination matters more than the headline hold might suggest. Tracker borrowers have avoided an immediate increase in payments and people already on fixed-rate mortgages will generally see no change to their existing monthly payment. But expectations about where Bank Rate could go next are already influencing the cost of new mortgage deals.

The message from September's meeting is therefore not that mortgage rates have stabilised. It is that the direction of rates has become more uncertain again.

Why did the Bank of England leave rates at 3.75%?

The Bank is trying to balance two different risks.

Inflation is running above its 2% target and has begun rising again, partly because of higher energy and transport costs. At the same time, monetary policy is already restrictive, the labour market remains relatively soft and there has so far been limited evidence that the initial energy shock is feeding into a much broader cycle of higher wages and prices.

UK CPI inflation rose to 3.1% in August 2026, up from 2.9% in July. The Bank now expects inflation to rise further over the coming months, with its latest projections suggesting it could reach around 3¾% in the final quarter of 2026 and move slightly above 4% in early 2027.

Higher energy prices are at the centre of that risk. Oil and wholesale gas prices have risen sharply during the continuing conflict in the Middle East, increasing the cost of fuel and putting further pressure on household and business energy bills.

The Bank's concern is not simply that energy becomes more expensive for a few months. The larger risk is that prolonged higher costs begin feeding into the prices of other goods and services and eventually influence wage settlements and inflation expectations.

Why could rates still rise?

So far, the Bank says there has been relatively little evidence of significant second-round effects from the energy shock.

That helped persuade six MPC members to wait rather than increase rates immediately. But the longer energy prices remain elevated or volatile, the greater the risk that higher costs become embedded elsewhere in the economy.

Three members of the Committee already believed that risk justified increasing Bank Rate to 4%.

That split is important because it shows how close the policy debate has moved towards tighter monetary policy again. Borrowers who had spent much of the previous year expecting a gradual series of rate cuts can no longer assume that the next move will necessarily be down.

Our guide to how rising interest rates affect your mortgage explains why trackers, standard variable rates, fixed-rate borrowers and new applicants can all be affected differently.

Energy prices are now driving the inflation outlook

The scale of recent energy-price movements explains why the Bank has become more cautious.

Its September meeting noted that Brent crude oil and UK wholesale gas prices had risen substantially since the July Monetary Policy Report. Household energy bills are also expected to increase further, with the Bank saying the Ofgem price cap could rise substantially again in the first quarter of 2027 if current wholesale prices persist.

Food inflation has so far been less severe than feared earlier in the year. The Bank's business contacts now expect annual food inflation to be nearer 4% by the end of 2026, compared with forecasts of 6% to 7% earlier in the energy shock.

That offers some reassurance, but the Bank says there are still upside risks from energy, adverse weather and agricultural conditions.

For mortgage borrowers, the significance is indirect but important. Inflation influences expectations for Bank Rate, those expectations influence financial markets and those markets help determine the funding costs lenders face when pricing new mortgages.

Bank Rate does not directly set fixed mortgage rates

One of the most common misunderstandings is that a fixed mortgage rate should move up or down by exactly the same amount as Bank Rate.

It does not work that way.

Bank Rate is highly influential, but lenders also consider wholesale funding costs, swap rates, market expectations, competition, loan-to-value and the risk associated with individual loans.

That is why fixed mortgage rates can rise before the Bank of England increases Bank Rate.

Markets can begin pricing in a possible future increase, pushing lenders' funding costs higher even while Bank Rate itself remains unchanged.

This is also why a Bank Rate hold does not automatically mean fixed mortgage rates will stop rising.

Fixed mortgage rates have already been moving higher

Mortgage pricing had already begun responding to changing interest-rate expectations before the September MPC decision.

Moneyfacts figures cited in reporting around the announcement put the average two-year residential fixed rate at around 5.77%, with the average five-year fix around 5.83% on 17 September.

Those are market averages rather than the rates every borrower will actually be offered. Individual deals can be considerably cheaper or more expensive depending on deposit, equity, product fees, lender criteria and the borrower's circumstances.

The important point is the direction of travel.

Several lenders have already repriced fixed-rate products upwards as expectations of future Bank Rate cuts have weakened and markets have begun considering the possibility of another increase.

For anyone trying to understand the difference between the main mortgage options, our guide to tracker versus fixed-rate mortgages explains the trade-off between payment certainty and exposure to changing rates.

What does the decision mean for tracker mortgages?

Tracker mortgages generally follow an external rate, most commonly Bank Rate, plus a fixed lender margin.

A mortgage priced at Bank Rate plus 0.75%, for example, would currently have a headline rate of 4.50% while Bank Rate remains at 3.75%.

Because the MPC did not increase Bank Rate in September, a straightforward Bank Rate tracker should not rise as a direct result of this meeting.

But tracker borrowers remain exposed to whatever happens next.

If the MPC eventually increases Bank Rate to 4%, a tracker linked directly to it would normally increase by the same quarter percentage