The Bank of England has decided to keep interest rates unchanged at 3.75% in its latest decision on Thursday. The Bank stated that it made this decision after assessing various risks to the UK economy, particularly the impact of the Iran war on inflation. However, policymakers emphasized that significant uncertainty remains regarding the economic outlook.
What Happened to Interest Rates on Thursday?
The Bank decided to maintain rates at 3.75%. Seven members of the Monetary Policy Committee (MPC) voted to hold, while two members—Megan Green and the Bank's chief economist Huw Pill—voted for an increase to 4%. This marks the fourth consecutive meeting where rates have been held at this level, following a gradual decline from a peak of 5.25% in August.
What Does This Mean?
The base rate influences the cost of mortgages and loans. Many lenders increased rates sharply after the outbreak of the Middle East conflict but have lowered them in recent weeks as market sentiment improved. Savings rates, which are also tied to the interest rate, are unlikely to change.
What Is Happening with Inflation in the UK?
The Bank uses interest rates to control inflation, targeting a rate of 2%. The latest official figures show that the Consumer Prices Index (CPI) inflation remained at 2.8% in May, unchanged from April, and still above the Bank's target. This was better than many economists had expected, with a reduction in food and drink inflation suggesting less pressure on households. However, UK inflation is expected to rise in the coming months, mainly due to an increase in household energy bills resulting from the US-Israeli war with Iran, which has restricted oil supply and driven global prices up.
What Has the Bank of England Said About the Middle East Energy Shock?
The Bank considered that oil prices had fallen in recent days after US President Donald Trump announced a peace deal with Iran. Governor Andrew Bailey described this as "encouraging," but stressed that inflation was still likely to rise due to previous damage. He also emphasized the unpredictable nature of the situation and the risk that energy prices could remain higher for a longer period.
Will Interest Rates Have to Rise?
Many economists now expect interest rates to remain unchanged for the rest of the year. James Smith, developed market economist for ING, predicted a "prolonged pause" before rate cuts resume in 2027. Matt Swannell, chief economic adviser to the Item Club, said the Bank was in "wait-and-see mode" regarding the inflation outlook and agreed that rates would likely stay on hold for the rest of the year. However, some MPC members believe rates should be increased. Megan Green and Huw Pill, who voted for a rate hike, expressed concerns about uncertainty in the UK inflation outlook and volatility in energy prices, despite the new ceasefire agreement.
