- The Bank of England has kept UK interest rates on hold at 3.75% as it warned that a further escalation in the Iran war could drive inflation above 4% next year, adding to cost of living pressures on households.
- The Bank's monetary policy committee (MPC) voted by six to three to keep its key base rate at 3.75%.
- The Bank said an adverse scenario involving a drawn-out war and oil prices remaining above $100 a barrel could drive UK inflation to a peak of 4.5% by the middle of 2027.
- Andrew Bailey, the Bank’s governor, played down suggestions among City traders that Threadneedle Street was edging closer to raising rates.
- Official figures showed inflation in the UK, down from a peak of 3.8% last year.
- The Bank said it expected the policy, alongside a £2 cap on bus fares in England, to lower the headline inflation rate by 0.1 percentage point.
- The MPC said it stood ready to act as necessary to prevent inflationary pressures from becoming entrenched.
- Catherine Mann, an external economist on the MPC, joined her fellow committee members in dissenting against the majority of the panel with a vote to raise rates immediately to 4%.
- Financial markets had priced in a more than 90% probability of Threadneedle Street keeping borrowing costs on hold, with the outside chance of a rise.
- The Bank of England said that under its central forecast – involving the oil price falling back to about $71 a barrel – it still expected UK inflation to peak at about 3.2% later this year as households come under pressure from higher energy prices.
The Bank of England has opted to keep interest rates steady at 3.75% as inflation fears escalate, particularly due to the ongoing conflict in Iran. The monetary policy committee (MPC) voted six to three to maintain the rate, reflecting a divided stance among policymakers.12
The Bank cautioned that a prolonged war could lead to inflation peaking at 4.5% by mid-2027, especially if oil prices remain above $100 a barrel. In a more optimistic scenario, where oil prices fall to about $71 a barrel, inflation is expected to peak at 3.2% later this year.310
Despite the current hold on rates, the MPC stated it is “ready to act as necessary” to prevent inflation from becoming entrenched. Some members, including Catherine Mann, voted for an immediate increase to 4%, highlighting the urgency of addressing inflationary pressures.78
Official figures indicate that inflation in the UK has decreased from a peak of 3.8% last year, but the Bank's measures, including a £2 cap on bus fares, are expected to lower the headline inflation rate by 0.1 percentage point.56
“The Bank of England's monetary policy committee voted 6-3 to maintain the rate, citing risks from a prolonged Iran war that could push inflation above 4%. Governor Andrew Bailey emphasized the Bank's readiness to act against entrenched inflationary pressures, while external economist Catherine Mann dissented, advocating for an immediate rate increase to 4%.”
The Guardian
