Monetary policy
The last mile has become a fork
The MPC held Bank Rate at 3.75 per cent. Energy is lifting CPI again. Underlying inflation is not. September’s meeting is a test of whether the Bank can tell the two apart.
Mira Calder
Editor · · 12 min
On 17 September the Monetary Policy Committee will decide, again, whether 3.75 per cent is the right price for money in an economy that has stopped overheating and has not yet been given permission to ease. The July meeting voted six to three to hold. Three members wanted a quarter-point rise. The next statement will be read in dealing rooms, in the Treasury, and in households whose two-year fixes roll off this winter. It should also be read as a test of whether the Bank can still tell a terms-of-trade shock from a domestic wage problem.
Bank Rate has sat at 3.75 per cent since December 2025, after a cutting cycle that took 1.5 points off the 5.25 per cent peak of August 2023. CPI inflation printed 2.6 per cent in June. The Bank’s own site now shows 2.9 per cent. The target is 2 per cent. In the July Monetary Policy Report the staff projection has inflation rising to around 3.2 per cent in the fourth quarter, then easing. The driver is energy, and the second-round effects that energy can drag into food, goods and, if the Bank is unlucky, into pay settlements.
What the vote actually said
A 6–3 hold is not a committee at peace. It is a committee that thinks the current rate is about the right level to get inflation back to target, while a hawkish minority wants to buy insurance against a shock that has already arrived on wholesale markets and has not yet finished walking through the CPI basket. Markets, at various points since the Middle East conflict widened, have priced one or two quarter-point rises over the next year. Economists have been slower. That gap is the story, not a round number on a Reuters poll.
The last mile of disinflation was supposed to be a glide. It is a fork: energy up, underlying down, labour loosening.
Look at the labour market if you want to know why a reflexive hike would be a mistake. The unemployment rate is 4.9 per cent. Vacancies in May to July were 707,000, below the pre-pandemic stock. The employment rate for 16- to 64-year-olds is 75.1 per cent, a shade lower than a year earlier. Average weekly earnings including bonuses rose 4.1 per cent in cash terms in the three months to June, 1.3 per cent in real terms. Strip out bonuses and the real rise is 0.7 per cent. That is not 2022. It is a labour market that has given the Bank permission to wait.
Underlying inflation is not the headline
The Bank’s own granular measure of underlying inflationary pressure peaked at 7.5 per cent in December 2022 and had fallen to 2.8 per cent in June. The 2000–2019 average was 3.0 per cent. If that series is to be believed, the recent pickup in CPI is coming from flexible, less central prices — energy, and the things energy moves — rather than from the sticky core the MPC is paid to police. World export price inflation, excluding oil, is expected to rise sharply in the second half of the year. Some of that is the conflict. Some of it is the scramble for memory chips. Sterling’s effective rate has been relatively stable, which means the Bank cannot blame the exchange rate for imported pressure and cannot rely on it for relief.
There is a respectable argument for a hike: second-round effects are easier to prevent than to unwind, and a 25 basis-point insurance premium is cheap compared with a lost inflation target. There is a better argument against: the premium is paid by a labour market that is already loosening, by a gilt stock that refinances at whatever Bank Rate implies, and by a Budget that has already taken the tax take to a post-war high. Insurance that recreates the problem it is meant to solve is not insurance. It is a habit.
What September should do
Hold, and say why. Say that energy will move the headline and that services and pay will decide whether it sticks. Say that three members wanted to move, so that the next meeting is not a surprise if the data worsen. Do not pretend that a relative-price shock is a reason to put more people on the inactive list by squeezing demand. The last mile became a fork. Forks are for choosing, not for splitting the difference until the handle breaks.
The essays that follow in this issue take the same fork into energy, inactivity and the gilt market. The briefing of 4 September sets out the numbers in one place. None of them will be improved by treating Threadneedle Street as a weather service. It is a decision. It should look like one.
This essay is commentary, not advice. Sources: Bank of England, Office for National Statistics, House of Commons Library, Office for Budget Responsibility, Resolution Foundation. See the editorial method.
