The Bank of England held its benchmark interest rate steady at 3.75% on Thursday, continuing to balance above-target inflation against weak economic output.
Seven of nine Monetary Policy Committee members backed the hold at the BOE’s May meeting, in line with expectations from economists polled by Reuters.
The two dissenting votes came from BOE chief economist Huw Pill and external MPC member Megan Greene, both of whom pushed to hike the base rate by 25 basis points to 4%.
Higher energy costs stemming from the Iran war have driven inflation higher across global economies, with the U.K. especially exposed as a net energy importer.
The BOE acknowledged in its decision summary that while prices have eased since the initial spike, the war “makes it hard to predict what is going to happen with them.”
U.K. inflation held at a cooler-than-expected 2.8% in May, driven largely by rising transportation fuel costs, while April economic data showed the economy contracted by 0.1%.
The energy price cap is set to rise 13% later this summer, pushing energy costs to a two-year high and threatening to reverse recent progress on inflation.
“The impact on the economy and inflation will depend on how long energy prices stay raised,” the BOE said, adding: “Monetary policy cannot affect global energy prices; our job is to make sure that higher inflation does not persist and have long-lasting effects on the economy. We are monitoring the situation very closely.”
Despite Washington and Tehran reaching a breakthrough in peace negotiations, LSEG figures show markets are still betting the Bank of England will raise rates before year-end.
U.S. President Donald Trump and Iranian President Masoud Pezeshkian electronically signed a 14-point Memorandum of Understanding on Wednesday, aimed at laying groundwork for a durable peace settlement to the four-month war.
The conflict had kept oil prices elevated through the effective closure of the Strait of Hormuz, a critical Middle Eastern shipping route, though progress on reopening it has offered some relief.
The Federal Reserve also opted to hold U.S. interest rates at 3.5%-3.75%, though investors were unsettled by hawkish signals from Kevin Warsh’s first meeting as Fed chair.
The European Central Bank became the first major central bank to raise its key interest rate in response to the energy crisis triggered by the Iran war, with the Bank of Japan following by lifting its policy rate to a 31-year high of 1%.
“We think the BoE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night,” said Luke Bartholomew, deputy chief economist at Aberdeen.
Bartholomew added: “In fact, if energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year.”
George Brown, senior economist at Schroders, warned the BOE cannot afford complacency, saying: “For now, the bank is playing for time rather than going on the attack.”
Brown noted that a softer labour market and weak growth should limit second-round inflation effects, while reopening the Strait of Hormuz could reduce the most extreme upside risks to energy prices.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said U.K. monetary policy now stands “at a crossroads,” with the U.S.-Iran peace framework boosting hopes that inflation could temper without further tightening.
