The Bank of England’s Monetary Policy Committee is widely expected to hold interest rates at 3.75% on Thursday (July 30) despite renewed uncertainty in the Middle East.
The current base rate was set during the last MPC meeting on June 18, where policymakers voted to hold for the fourth consecutive time. Economists at Oxford Economics and Nomura forecast another seven-to-two vote in favour of maintaining the rate.
Inflation eases but expected to rise
UK inflation eased to a 15-month low of 2.6% in June, helped by slower food and fuel price growth. However, the Bank has predicted inflation will rise back to 3.25% later this year as higher energy costs feed through to household bills from July.
The recent decline offered some relief to the MPC, which uses interest rates to keep inflation in check. But inflation is now widely expected to swing higher and drift away from the Bank’s 2% target.
Middle East conflict heightens uncertainty
The collapse of the ceasefire between US-Israeli and Iranian forces has heightened uncertainty, with fears of renewed hostilities pushing inflation upwards. Oil prices climbed above $100 per barrel on Thursday for the first time since May, as Red Sea shipping attacks and threats from President Trump raised concerns over supply disruptions.
Governor Andrew Bailey is expected to outline how the escalating conflict has shaped the Bank’s inflation forecasts and policymaker decisions.
Economist warns of energy price spike
Thomas Pugh, chief economist at RSM UK, said: “The dip in inflation to 2.6 per cent in June is good news for households and should put to bed any lingering chance of an interest rate hike next week. However, this will mark the low point for this year.
“Rebounding energy prices, a wave of inflation coming through supply chains and a pickup in food prices will probably drive inflation to a peak of 3.3 per cent in the autumn, even after the removal of VAT on energy bills.
“The obvious risk is that energy prices surge again, given renewed tensions in Iran and a hot summer, which could push inflation markedly higher.”
Thomas believes oil prices will largely dictate the direction of interest rates. “If they remain close to 100 dollars per barrel over the summer, a September rate hike would move firmly onto the table, with another in the winter likely,” he said. “However, if there is another peace deal and prices drop back a little, we think a weakening labour market and deteriorating economic outlook will keep the Bank on hold this year, before cutting three times in 2027.”
Sluggish growth weighs on decision
The deepening Middle East conflict is also expected to weigh on the Bank’s growth projections. UK GDP rebounded in May with a modest 0.1% increase for the month. Rate-setters may be reluctant to raise interest rates against a backdrop of sluggish economic growth.
