Bank of England poised to hold rates at 3.75% as Iran war fuels oil swings
The Bank of England is widely expected to leave its benchmark rate unchanged at 3.75% on Thursday, extending a pause that began in December as the five-month closure of the Strait of Hormuz keeps inflation above target.
Rate decision expected
The Bank of England's Monetary Policy Committee is set to announce its latest interest rate decision at 12:00 BST on Thursday, with a hold at 3.75% the widespread expectation. The nine-member committee, composed of five women and four men, is forecast by most economists polled by Reuters to vote 7-2 in favour of no change, extending a pause that has been in place since December. The benchmark Bank rate is at its lowest level since February 2023, and few analysts predict any short-term shift. Governor Andrew Bailey will address a press conference at 1200 GMT, an hour after the decision, policy minutes and new economic forecasts are published.
Inflation and energy pressures
UK inflation was 2.6% in the year to June, down slightly from the previous month but still above the 2% target. The rate is likely to rise in July as millions of households in Scotland, England and Wales feel the impact of a 13% increase in domestic energy prices, a direct result of the Iran war's effect on wholesale energy costs. Last month, the BoE lowered its forecast for peak inflation this year to just over 3.25%, down from a prediction of 3.6%-3.7% in April. Although natural gas prices have risen since then, oil price futures remain near the lowest of the BoE's scenarios, despite a spike above $100 a barrel last week.
Global central bank context
The BoE's wait-and-see approach contrasts with other major central banks. The European Central Bank raised rates in June, while the U.S. Federal Reserve left rates unchanged on Wednesday. However, three of the 12 members of the Federal Open Market Committee said they would have preferred a quarter-point rise, and Chair Kevin Warsh stated he had "no tolerance" for inflation. The BoE had already signalled in March that previously expected cuts to borrowing costs were off the table because of the war, a stance Governor Bailey has reiterated.
- BoE signals rate cuts off the table due to Iran war
- European Central Bank raises interest rates
- Federal Reserve holds rates; three FOMC members dissent for a hike
- BoE expected to hold Bank rate at 3.75%
- Rate futures price in a quarter-point hike
- Another quarter-point hike expected by markets
Market and analyst reactions
Rate futures markets on Wednesday pointed to a quarter-point hike by November and another by March 2027, even though most economists expect no change at all this year. Chief Economist Huw Pill and external MPC member Megan Greene are expected to have voted again for a rise, with Deputy Governor Clare Lombardelli and external member Catherine Mann seen as the likeliest to join them. Mann said this month that a fall in market borrowing costs could make it harder to control inflation.
Neither current oil prices nor recent economic data warrant a hasty response, either in the form of an immediate rate hike or an overly hawkish set of communications.
Political backdrop
A hold would be a relief for new Prime Minister Andy Burnham, who has prioritised cost-of-living measures, including scrapping a tax on household electricity bills. The BoE is also expected to publish its latest analysis on quantitative tightening ahead of a decision on unwinding its portfolio of government debt in September.
A new government finding its feet, and the situation in the Middle East becoming increasingly uncertain, mean that a hold on [the] base rate decision would be a welcome dose of stability. People have had more than enough uncertainty over the past year, and even a temporary pause eases the pressure a little.
