The Bank of England has decided to maintain interest rates at 3.75 percent, a level unchanged since December. The central bank cautioned that inflation and the cost of living are expected to increase this year as a consequence of the ongoing conflict with Iran.
Monetary Policy Committee Vote
Seven out of nine members of the Monetary Policy Committee (MPC) voted to keep rates steady, while two members advocated for a rise to 4 percent. Governor Andrew Bailey, who supported the hold, noted that oil prices have declined recently, which is encouraging, but remain higher than before the war. He emphasized that the higher energy prices over the past four months have already created inflationary pressures.
Impact of Iran Peace Deal
The decision comes after Donald Trump announced a 60-day agreement with Iran ensuring free passage through the Strait of Hormuz. This potential peace deal has driven oil prices down toward pre-war levels. The MPC now expects Consumer Prices Index (CPI) inflation to be just under 3 percent over the next three months, rising to slightly above 3.25 percent by late 2026. This forecast is lower than all three scenarios outlined in April, the most optimistic of which predicted inflation peaking at around 3.6 percent by year-end.
Under a worst-case scenario with persistently high oil prices, the MPC had previously estimated inflation could reach as high as 6.2 percent. Despite the improvement, the Bank noted that some effects of the energy shock, particularly from fuel price spikes, have already contributed to inflation. Official figures show CPI inflation remained at 2.8 percent in May, unchanged from April and above the Bank's 2 percent target.
Dissenting Voices
Two MPC members, Megan Greene and Huw Pill, preferred to raise rates as a precautionary measure. They expressed concerns about the uncertainty surrounding the UK inflation outlook and the volatility of energy prices, despite the new ceasefire agreement.
