The Bank of England is expected to keep interest rates on hold at 3.75% when its Monetary Policy Committee meets this week, as the recent Iran peace deal eases inflationary pressures. The US Federal Reserve is also anticipated to maintain its benchmark rate at between 3.5% and 3.75% in its first decision under new chair Kevin Warsh.
UK inflation currently stands at 2.8%, above the Bank's 2% target, but analysts believe most MPC members will adopt a wait-and-see approach. Financial markets still price in one more rate rise this year, likely in December. ING economist James Smith noted that if the peace deal endures and oil flows resume, UK inflation could stay below 4%, enabling the Bank to avoid a summer hike.
In contrast, the European Central Bank raised rates from 2% to 2.25% last week after eurozone inflation reached 3.2%. ECB President Christine Lagarde warned that higher energy prices are feeding through to other sectors, with second-round effects such as wage increases prompting further action. However, both the Fed and Bank of England appear to be holding steady for now.
Bank of England Governor Andrew Bailey stated last week that there is less pressure to raise borrowing costs after commercial lenders voluntarily increased rates on loans and mortgages. The peace deal, which triggered an immediate drop in oil prices, is expected to dampen inflation over the coming months.
