The Bank of England held interest rates at 3.75 per cent today, but warned that surging energy prices could push it to increase the benchmark rate in the coming months. 

The Monetary Policy Committee voted to keep the Bank rate at its current level for the sixth meeting in a row, holding firm as other central banks hike rates to combat higher inflation.

There was no change from July's meeting, with six rate setters voting to keep the benchmark rate at 3.75 per cent and three voting to hike. 

But Governor Andrew Bailey warned the Bank might need to raise rates if energy costs remain high. 

He said: 'Today, we’ve held Bank Rate at 3.75 per cent. 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 per cent target.'

Since the committee's last meeting, escalating hostilities in the Middle East have pushed oil prices to their highest level in months, with Brent crude surpassing $100 a barrel.

Figures published on Wednesday show inflation stood at 3.1 per cent in August, from 2.9 per cent in the previous month.

Core inflation – which strips out volatile food and energy prices – held steady for the fourth month in a row at 2.6 per cent, raising hopes that the UK has not yet seen severe second-round effects from the energy price shock.

However, economists have warned that the deterioration of the situation in the Middle East could push prices higher, with inflation reaching 4 per cent by the new year, double the Bank of England's target.

Central banks typically raise rates to bring down inflation and cut them once prices are back under control.

The longer energy prices are elevated, the greater the risk inflation becomes embedded and starts to feed through to second round effects. 

The Bank of England has adopted a 'wait and see' approach as it assesses the impact of the energy shock before taking decisive action.

Economists at investment bank ING said: 'The UK economy is far less susceptible to second-round effects than it was during the Ukraine shock four years ago. 

'There's nothing in [the inflation data] that suggests the Bank of England needs to turn more hawkish. 

'Inflation is currently behaving fairly predictably – which wasn't the case back in 2022, when the data was consistently coming in above forecasts.' 

But millions of households and businesses still face a sharp increase in the cost of their mortgages and other loans.  

Higher inflation will put pressure on the Bank to raise rates, with markets pricing in four increases by the end of next year. 

That will add to a cost-of-living crisis that shows no signs of abating, with new analysis suggesting energy bills, which are set to rise to a three-year high next month, are forecast to climb a further 25 per cent in January.

It will also spell pain for those looking to remortgage or get onto the housing ladder. 

Speculation over rate hikes over the coming months has prompted major banks, including NatWest, Santander, HSBC, Lloyds Bank and TSB, to raise mortgage rates, with others 'highly likely' to follow suit, say experts.

The average five year mortgage rate stands at 5.87 per cent, its highest level since November 2023. 

Motorists are also being squeezed, with petrol prices hitting a four-year high.

The Bank of England must navigate higher prices carefully because the forces pushing up energy, and possibly food, are supply rather than demand led. Higher interest rates cannot tame the geopolitical uncertainty and could have a knock-on impact on already delicate economic growth.

Rob Morgan, chief investment analyst at Charles Stanley, said: 'The BoE therefore needs to tread an exceptionally narrow and thorny path as it aims to tame inflation while averting an economic downturn. 

'For now, there is little evidence of feared 'second round' effects, and no indication yet that the weak jobs market will turn around'.

Economists think the Bank of England will hold rates through the year before cutting, though it will depend on how high food and energy prices go. Any fiscal stimulus in the Budget could also add to inflation pressures.

Today's decision came after the Federal Reserve unanimously voted to increase interest rates by 0.25 percentage points to 4 per cent, for the first time since 2023.

It is the first time the Bank of England has diverged from the US central bank since September 2024, when it kept its benchmark rate unchanged while the Federal Reserve announced a 50 basis point rate cut.

'The Bank of England is officially the last one standing of the central bank triumvirate, choosing to continue to hold interest rates while everyone else raises them,' said Richard Carter, head of fixed income research at Quilter Cheviot. 

'With much of the current spike in inflation energy based, due to the Middle East, the Bank of England has very little control over the path for overall inflation, so a rise now could cause more economic pain at a time when eyes are on Budget speculation.' 

He added: 'That said, markets still expect the BoE to raise rates at least once this year and a few more times into next. There is an argument that it could end up being too slow to respond to inflation should these energy price rises seep into other parts of the economy and become entrenched.'