The Bank of England has kept interest rates on hold as it warned a continuation of the bitter fighting in the Middle East could force it to raise borrowing costs amid mounting fears over inflation. It also announced a surprise plan to sell billions of pounds in UK government bonds back to the Treasury to avoid fuelling turbulence in the gilt market, a decision that could have significant consequences for the public finances before next month's budget. ## Six to Three for the Hold As the fallout from the war fuels a rise in energy prices, the Bank's monetary policy committee voted by a majority of six to three to keep its base rate unchanged at 3.75 percent. However, the Bank said the increasingly probable prospect of a lengthy war fanning intense volatility in global markets had dramatically raised the chance of it putting up borrowing costs in future. "So far higher global energy costs have had a limited effect on price and wage setting in the UK," said Andrew Bailey, the Bank's governor. "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 percent target." With Threadneedle Street under pressure to guard against high inflation becoming entrenched, City traders predict a quarter-point rise in borrowing costs from as early as November, with three more increases to 4.75 percent likely next year. The vote split itself told the story of a committee divided between inflation hawks and members worried about growth, the widest division since the war began reshaping the economic outlook. ## Inflation Heading for 4 Percent The Bank said inflation was on track to reach 4 percent by early next year as the war-driven rise in energy prices hits households. Official figures on Wednesday showed inflation rose to 3.1 percent last month from 2.9 percent in July, as escalating hostilities in the Middle East drove the average price of petrol and diesel up by almost a quarter. The committee said the economy was showing signs of resilience and there was not yet a need to act, because there had been "little evidence so far of material second-round effects" — when inflationary pressures push businesses and workers to demand higher prices and pay settlements. There were also signs of weaker food price inflation despite the energy surge triggered by the Iran war. The global squeeze is synchronised: the sharp rise in energy prices prompted the US Federal Reserve to raise interest rates on Wednesday for the first time since 2023, following a decision last week by the European Central Bank to raise eurozone borrowing costs. ## A Surprise Bond-Sale Plan Against a volatile backdrop, the Bank announced updated proposals for winding down its financial crisis-era quantitative easing programme, which at its peak involved 895 billion pounds of UK government bond purchases. In a surprise move, the Bank said it planned to sell 146 billion pounds of bonds to the Treasury, at a pace of about 20 billion pounds a year until 2034, in a plan requiring sign-off from the chancellor, John Healey, next April. The Treasury's Debt Management Office would then sell bonds to cover the government's financing commitments, including this buyback. The rationale: the Bank holds long-term bonds where investor demand is dwindling, whereas the DMO can cover the buyback by issuing shorter-term debt. The process will complete the quantitative tightening programme, which since 2022 has reduced the Bank's holdings to about 488 billion pounds. The Bank said it would retain about 120 billion pounds of bonds to back the issuance of notes and coins, leaving about 222 billion pounds to be disposed of by letting maturing debts expire and through active sales to the state if a deal is agreed. It will pause quantitative tightening until a deal is finalised, and resume sales to City investors if no agreement is reached. In a letter to the chancellor, Bailey said the arrangement preserved "the independence of monetary policy" and would "maximise value for money by minimising cost and risk over the lifetime" of the programme. UK government borrowing costs and the pound fell slightly on Thursday after the decision. The Bank also said it would halt sales of long-dated gilts entirely, and the 10-year gilt yield fell by six basis points to 5.243 percent, its lowest level in a week. The announcement landed with budget politics already charged. Andy Burnham, the Greater Manchester mayor positioning for the Labour leadership, said ahead of the decision that he was prepared to take difficult decisions to tackle high inflation and would act on the cost of living at next month's budget. The Office for National Statistics separately upgraded its estimates for UK productivity growth, a modest boost for the chancellor as he finalises the fiscal statement.