The Bank of England (BoE) left interest rates unchanged at 3.75% on Thursday, as the recent peace deal between the US and Iran is expected to ease inflationary pressures. UK inflation currently stands at 2.8%, above the BoE's 2% target, but analysts said most of the monetary policy committee (MPC) adopted a wait-and-see approach before reacting to the deal, which triggered an immediate drop in oil prices.
The decision comes after a weekend agreement between President Donald Trump and Iran that reopened the Strait of Hormuz, a key oil shipping route. Financial markets now price in just one more UK rate rise this year, in December, as the deal is predicted to lower energy costs and reduce inflation over the coming months.
James Smith, an economist at ING, noted uncertainty over the deal's durability but said if it endures, 'UK inflation would likely stay below 4% and enable the Bank of England to avoid a rate hike this summer.' The BoE's move mirrors that of the US Federal Reserve, which also held rates (at 3.5%-3.75%) in its first decision under new chair Kevin Warsh. In contrast, the European Central Bank raised rates to 2.25% last week amid rising eurozone inflation.
ECB President Christine Lagarde warned that higher energy prices are feeding through to other parts of the economy, encouraging aggressive wage bargaining. The BoE governor, Andrew Bailey, said last week that less pressure existed to raise borrowing costs after commercial lenders increased rates on loans and mortgages.
