The Bank of England (BoE) and the US Federal Reserve are expected to keep interest rates unchanged this week, as the recent peace deal in the Middle East is predicted to ease inflationary pressures. The Fed is likely to hold its benchmark rate at 3.5% to 3.75% on Thursday, marking the first policy decision under new chair Kevin Warsh, appointed by President Donald Trump.
Investors will scrutinise Warsh's comments for clues on future rate moves, especially after US inflation jumped to a three-year high of 4.2% in May. Before the Iran deal, Warsh faced pressure to raise rates, but the opening of the Strait of Hormuz is expected to reduce inflation over the rest of the year.
The BoE is expected to hold rates at 3.75%, despite UK inflation running at 2.8%, above its 2% target. Analysts predict most of the nine-member monetary policy committee will adopt a wait-and-see approach, with financial markets pricing in one more rate rise in December. James Smith of ING noted that if the peace deal holds, UK inflation would likely stay below 4%, allowing the BoE to avoid a summer rate hike.
Last week, the European Central Bank raised rates from 2% to 2.25% after eurozone inflation rose to 3.2% in May. ECB President Christine Lagarde warned that higher energy prices were feeding through to other sectors, and that second-round effects, including wage increases, required action.
BoE Governor Andrew Bailey said there was less pressure to raise borrowing costs after commercial lenders increased rates on loans and mortgages.
