The Bank of England (BoE) kept its benchmark interest rate steady at 3.75% Thursday, meeting analysts' expectations as it opted against a hike despite risks to inflation after the U.S.-Iran war pushed up energy prices.
The widely expected BoE decision came after the Federal Reserve (Fed) on Wednesday signalled a U.S. rate increase this year, even as it kept borrowing costs steady.
The Bank of Japan (BOJ) on Tuesday raised interest rates to a 31-year high as it battles inflation caused by the Middle East war, while the European Central Bank (ECB) last week raised its benchmark rate for the first time since 2023.
"Oil prices have fallen in recent days, and that's encouraging," Bank of England Governor Andrew Bailey said after the decision.
"But they're still higher than before the war," he noted. "Whatever happens in the future, the higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline."
Britain's annual inflation rate remained at 2.8% in May, official data showed on Wednesday, still above the central bank's 2% target.
"Our job is to make sure that higher inflation does not persist and have long-lasting effects on the economy," the central bank said in a statement Thursday.
Two members of the bank's monetary policy committee voted for an immediate quarter-point increase to 4.0%.
Bailey joined the six remaining members in calling for no change, minutes of the meeting showed.
The BoE said it would keep a close watch over the wider U.K. and global economy, including British unemployment.
The jobless rate eased to 4.9% in the three months to the end of April, after a 5.0% reading in the first quarter, the Office for National Statistics (ONS) said earlier Thursday.
The youth unemployment rate held steady at more than 16%, the ONS said.
A government-commissioned review last month warned that Britain risked creating a "lost generation" as the number of 16- to 24-year-olds not in employment, education or training topped one million in the first quarter of the year.
Key vote
Britain's economy contracted slightly in April as the Middle East war hit growth.
While that conflict appears close to being over, fighting within Britain's Labour Party is clouding the outlook for the country's economy.
Britain was also holding a key local election on Thursday that could trigger the endgame for Labour leader Keir Starmer's beleaguered premiership, or win him a reprieve.
Labour Party veteran and Greater Manchester mayor Andy Burnham is looking to win the parliamentary by-election for the Makerfield constituency in northwestern England, so that he can then try to replace Starmer as prime minister.
Starmer, in power since July 2024, has been clinging on by his fingernails since centre-left Labour suffered a drubbing in local and regional elections last month.
He has been rocked by several policy U-turns and a scandal over his appointment of Peter Mandelson, a former associate of convicted sex offender Jeffrey Epstein, as the U.K.'s ambassador to Washington.