The US Federal Reserve and the Bank of England are expected to leave interest rates unchanged this week, as the peace deal in the Middle East is anticipated to alleviate inflationary pressures.
Federal Reserve Decision
The US Federal Reserve is projected to maintain its benchmark interest rate at a range of 3.5% to 3.75% on Thursday. This will mark the first policy decision under the new Fed chair, Kevin Warsh, who was appointed by Donald Trump.
Investors will closely monitor Warsh's comments during the press conference following the decision, seeking insights into his views on the trajectory of US inflation and the broader economy. Inflation in the world's largest economy has surged from 2.4% in February to a three-year high of 4.2% in May.
Before Trump's new deal with Iran over the weekend, Warsh faced mounting pressure to raise interest rates in response to rising prices, despite the president's opposition. However, he is expected to state that the reopening of the Strait of Hormuz will help curb inflation for the remainder of the year.
Bank of England Outlook
The Bank of England is anticipated to hold interest rates at 3.75%, even though UK inflation stands at 2.8%, above its 2% target.
Analysts suggest that most members of the Bank's nine-member Monetary Policy Committee will adopt a cautious approach when they meet on Thursday, awaiting further developments following the deal that triggered an immediate drop in oil prices. Financial markets still anticipate one more UK rate hike this year, likely in December.
James Smith, an economist at ING, noted uncertainty about the durability of the peace deal. "But if the deal endures and oil starts flowing again, UK inflation would likely stay below 4% and enable the Bank of England to avoid a rate hike this summer," he added.
European Central Bank Actions
Last week, the European Central Bank raised interest rates from 2% to 2.25% after eurozone consumer price inflation rose to 3.2% in May 2026, up from 3% in April.
ECB President Christine Lagarde stated on Monday that higher energy prices are beginning to affect other sectors of the economy. "Indirect effects of inflation, we have absolutely started to see that more or less everywhere in recent weeks," Lagarde told French radio.
"When we start to feel second-round effects bubble up – which are risks of wage increases in particular – we necessarily have to take measures," she added.
Officials are concerned that the Middle East conflict has already spurred aggressive wage bargaining, forcing manufacturers and retailers to raise prices into the summer and autumn to maintain profit margins. Like the BoE and the Fed, the ECB targets a 2% inflation rate.
Bank of England Governor's Remarks
Bank of England Governor Andrew Bailey said last week that there is less pressure on the Monetary Policy Committee to raise borrowing costs after commercial lenders increased rates on loans and mortgages.
