Bank of England holds rate at 3.75% as US-Iran truce eases inflation fears

Decision holds steady

The Bank of England's Monetary Policy Committee voted 7-2 to keep the Bank Rate at 3.75%, where it has stood since the start of the US-Iran conflict in February. The decision matched economists' forecasts and reflected a cautious assessment of still-uncertain inflation pressures.

Dissent grows but majority stays cautious

Chief Economist Huw Pill was joined by external member Megan Greene in calling for a quarter-point increase, arguing that early action was needed to prevent "second-round" effects from elevated energy costs becoming entrenched. The remaining seven members, including Governor Andrew Bailey, opted to wait, citing the tentative truce between the US and Iran and softer-than-expected inflation data.

Inflation and growth: a mixed picture

Consumer price inflation unexpectedly held at 2.8% in May, a 13-month low, as a slowdown in food prices offset rising airfares and petrol costs. However, the Bank warned that higher energy prices over the past four months have created "inflationary pressure in the pipeline", and it still expects inflation to exceed 3.25% by the fourth quarter. The UK economy contracted by 0.1% in April, though the BoE slightly upgraded its estimate of underlying quarterly growth to 0.2%.

Geopolitics and energy

The emergence of a tentative peace deal between the US and Iran has pushed oil prices below $80 a barrel and raised hopes that the Strait of Hormuz could reopen, easing one of the main channels fueling UK inflation. Yet the Bank stressed that the sustainability of the truce remains uncertain. Governor Bailey described the oil price drop as "encouraging" but said it was too soon to sound the all-clear.

Market reaction

Sterling fell 0.6% against the dollar to around $1.3212, its lowest since early April, and also weakened versus the euro. The yield on the two-year UK gilt rose 7 basis points to 4.2%, while the FTSE 100 index lost 1%. Swap rates, which influence mortgage pricing, have declined by about 0.35–0.40 percentage points from their May peak, feeding expectations that lenders including HSBC and Barclays may cut mortgage rates further.

Analysts weigh in

A peace deal between the United States and Iran, if it survives, removes a significant risk to future inflation and while rate-setters will not wish to take anything for granted, evidence suggests inflationary pressures are sufficiently contained at present to avoid having to take interest rates into even more restrictive territory.

The BoE likely has room to assess the energy shock before taking decisive action. Recent dovish data is a reminder to the MPC that moving too soon could significantly dampen growth prospects.

The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures. But with the recent fall in energy prices and the softer inflation data yesterday, events are evolving in line with, or potentially even better, than the Bank's scenario A from the last meeting, which was consistent with keeping rates on hold this year.

Timeline of key events