The Bank of England is set to keep interest rates on hold as policymakers navigate the dual challenges of an energy shock from the Middle East and a slowing economy. Many economists do not anticipate a rate hike this month, despite concerns that the Iran conflict is putting upward pressure on UK inflation.
Rate Decision Expected on Thursday
The Bank's Monetary Policy Committee (MPC) is widely expected to maintain the base rate at 3.75% when it announces its decision on Thursday. Rates have been gradually reduced from a peak of 5.25%, but the outbreak of conflict between the US-Israel alliance and Iran at the end of February halted further cuts.
This is largely due to the impact on energy costs, which drove up fuel prices in March and are expected to lead to higher household energy bills from the summer. However, the MPC is wary of raising rates if it stifles economic growth.
Economic Data Shows Contraction
New official figures published on Friday revealed that gross domestic product (GDP) declined by 0.1% in April, the first contraction in eight months, indicating that some sectors are feeling the impact of the Middle East conflict.
Suren Thiru, chief economist for ICAEW, said: "An interest rate hold on Thursday looks highly certain with rate-setters likely to maintain a watchful approach to tightening policy given the recent deluge of downbeat economic data and growing global uncertainty."
Thiru added: "Though interest rates could stay at 3.75% for the rest of the year, it will become an increasingly close call as inflation starts to surge over the summer, especially if turbulence in the Middle East persists."
Central Banks Around the World
The European Central Bank opted to increase its interest rate on Thursday for the first time in almost three years, noting that the conflict was generating inflation pressures. The US Federal Reserve will also announce its next interest rate decision next Wednesday and is widely expected to keep rates on hold.
Sanjay Raja, chief UK economist for Deutsche Bank, said the Bank of England "continues to walk a narrow path in balancing weaker labour market outcomes with emerging price pressures" and cautioned that the "MPC's patience may be running thin."
Raja also predicts that interest rates will remain unchanged for the rest of 2026 but noted that "the odds of a rate rise are increasing," adding: "The duration of the energy shock is becoming non-negligible. And the spillover of price pressures is also becoming uncomfortable."
