Three major central banks are looking at the same oil shock and giving three different answers. The Federal Reserve raised on Wednesday. The European Central Bank has raised. On Thursday the Bank of England held at 3.75%, and left the door conspicuously open.
The vote was not unanimous. Three of the nine rate-setters on the Monetary Policy Committee voted for a rise to 4%, and the tone from the ones who didn’t was hawkish. Governor Andrew Bailey put the condition plainly: “So far, higher global energy costs have had a limited effect on price and wage setting in the U.K. 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.”
The case for holding, and against
Inflation in Britain rose again in August, to 3.1%, above the 2% target and driven mostly by prices at the pump and household energy bills. In July the bank expected inflation to average 3.2% in the final quarter. Crude rose above $110 a barrel this week and European natural-gas prices are near their highest level since 2023 on renewed supply concerns from the Middle East.
The argument for holding is that most policymakers see few signs of higher energy costs spilling into everyday prices, and that the recent pickup in bond yields is already restraining activity on its own. That second point is doing real work: the benchmark 10-year gilt hit its highest level since 2008 this week, closing at 5.218%, as investors worry about bulging debt loads and inflation. That is roughly 27 basis points above the U.S. 10-year — a striking premium for a developed sovereign.
Huw Pill, the bank’s chief economist, who voted to raise, was blunt about why: “The magnitude and persistence of the inflationary impulse stemming from events in the Middle East have proved stronger than expected in July.”
The quieter decision
The bank also changed how it shrinks its bond holdings — the process known as quantitative tightening. Instead of setting an annual reduction target, it will now unwind its remaining stock of gilts to zero at an average pace of £46 billion a year, equivalent to $61.5 billion, by the end of 2034. It will pause auctions until April while it reviews a model of selling the bonds to the government.
That is arguably the more consequential move. Yael Selfin, chief economist at KPMG, read the whole package as cautious in tone but pointed: the risks to the inflation outlook have increased, with energy prices expected to stay higher for longer, raising the possibility of a rise in November.
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This is the useful counterexample to a common assumption, which is that central banks move together. They don’t, and the gaps between them are where currency risk lives.
For a U.S.-based portfolio, the practical implication is narrow. An international equity fund carries two exposures, not one: the companies and the currency. The dollar barely moved on Thursday — the WSJ Dollar Index slipped 0.10% to 96.07 — while the pound sat at $1.3357 and the euro at $1.1476. When the Fed raises and another central bank holds, the interest-rate differential usually supports the dollar, which quietly reduces the dollar value of unhedged foreign holdings even when those companies do fine.
None of that is a reason to do anything today. It is a reason to know whether the international sleeve in a 401(k) is currency-hedged or not, which is stated on the fund fact sheet and which most owners have never checked. It is also the honest reason this desk keeps international exposure broad and modest rather than making country calls: three central banks looking at one oil shock produced three different answers this week, and nobody predicted that spread in July.