The Bank of England (BoE) kept its main interest rate unchanged at 4.25% on Thursday, as fears grow that the conflict between Israel and Iran will escalate and inflation remains above its long-term target.
The decision on Thursday by the bank’s nine-member Monetary Policy Committee (MPC) was widely anticipated.
With U.K. inflation at 3.4% above the bank’s target rate of 2%, policymakers were mindful of how the conflict in the Middle East would impact oil prices, which have risen sharply in recent days to over $75 a barrel.
Noting the elevated global uncertainty and persistent inflation, the Monetary Policy Committee (MPC) voted 6-3 to keep rates on hold. Deputy Governor Dave Ramsden joined Swati Dhingra and Alan Taylor to vote for a quarter-point reduction.
A Reuters poll of economists had forecast a 7-2 vote to keep rates on hold after the central bank cut borrowing costs last month for the fourth time since August 2024.
"Interest rates remain on a gradual downward path," BoE Governor Andrew Bailey said, although policymakers added that interest rates were not on a preset path.
"The world is highly unpredictable. In the U.K., we see signs of softening in the labor market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation," he added.
The central bank said rising tensions in the Middle East, as it held its meeting over the past week, had not been key to June's decision to hold rates but would be closely monitored going forward.
"Global uncertainty remains elevated. Energy prices have risen due to the escalation of the conflict in the Middle East. The Committee will remain sensitive to heightened unpredictability in the economic and geopolitical environment and will continue to update its assessment of economic risks," the bank said in its MPC summary.
Nearly all 60 economists polled by Reuters before the BoE's June meeting had predicted it would keep Bank Rate on hold at 4.25%, with the next cut likely in August, and a further reduction in the final three months of this year.
Before Thursday's rate decision, investors were pricing around two more quarter-point rate cuts by the BoE to 3.75% by December 2025.
The central bank kept its guidance, saying it would take a "gradual and careful" approach to further rate cuts.
The BoE left its forecast for inflation broadly unchanged for the second half of this year, seeing a peak rate of 3.7% in September and an average of just under 3.5% for the rest of the year.
The economy is expected to grow around 0.25% in the second quarter of this year, slightly stronger than in its May forecast, though it said the underlying pace was weak.
Since the middle of last year, the BoE has cut interest rates by one percentage point, the same as the U.S. Federal Reserve (Fed) which on Wednesday held interest rates at the 4.25%-4.50% range – but only half as much as the European Central Bank (ECB), which has had less persistent inflation.
Markets see just under half a percentage point more easing by the Fed this year and a further quarter-point cut by the ECB.
The Fed on Wednesday cut its economic growth forecasts for 2025, raised its inflation projection and said the uncertainty hanging over the economy had diminished but remained elevated.
