The Bank of England is widely expected to keep interest rates on hold at 3.75% this week, as analysts predict that the recent Middle East peace deal will ease inflationary pressures. UK inflation currently stands at 2.8%, above the Bank's 2% target, but the agreement between the US and Iran is expected to reduce energy costs and slow price rises.
The decision comes alongside the US Federal Reserve's first policy meeting under its new chair, Kevin Warsh, who is anticipated to leave the benchmark rate unchanged at between 3.5% and 3.75%. US inflation jumped from 2.4% in February to a three-year high of 4.2% in May, but the reopening of the Strait of Hormuz is expected to temper price growth in the coming months.
According to James Smith, an economist at ING, uncertainty remains over how long the peace deal will hold. However, he noted that if it endures and oil flows again, UK inflation would likely stay below 4%, allowing the Bank of England to avoid a rate hike this summer. Financial markets are still pricing in one more UK rate rise this year, in December.
In contrast, the European Central Bank raised its key rate last week 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 measures were needed to counter second-round effects, particularly risks of wage increases.
Bank of England Governor Andrew Bailey said last week that pressure on the monetary policy committee to raise borrowing costs had lessened after commercial lenders increased rates on loans and mortgages. The Bank's nine-member committee is expected to adopt a cautious stance when it meets on Thursday, watching how the peace deal affects the economy before making any move.
