Bank of England to Keep Rates Steady

The Bank of England is widely expected to leave interest rates unchanged at 3.75% as policymakers take a cautious stance on whether higher energy prices linked to the Iran conflict could trigger longer-lasting inflation pressures. UK inflation has stayed above the central bank’s 2% target for most of the past five years, with the BoE previously warning it could rise above 3.5% later this year. However, inflation remained steady at 2.8% in May, unchanged from April’s 13-month low and below the BoE’s expectations. Also, markets have gained some reassurance from the possibility of a US-Iran agreement that could reopen the Strait of Hormuz and reduce the risk of energy-driven price spikes. Nevertheless, policymakers remain concerned that companies could pass higher costs through the economy or that public confidence in the inflation target could weaken.

The Bank of England voted 8–1 to keep Bank Rate unchanged at 3.75% in April 2026, with one member preferring an increase to 4% and several policymakers indicating they could consider additional rate increases in the future. Policymakers highlighted that the conflict in the Middle East has created significant uncertainty for global energy prices. While monetary policy cannot directly influence them, the Committee aims to ensure any inflationary impact feeds through in a way consistent with the 2% target over the medium term, with outcomes dependent on the scale and duration of the shock and how it spreads through the economy. CPI inflation has risen to 3.3% and is expected to move higher later in the year as energy costs pass through, raising the risk of second round effects in wages and pricing. However, a loosening labour market and weaker growth may help contain inflation pressures, while tighter financial conditions since the conflict began are also expected to dampen demand.

The Bank of England is widely expected to keep interest rates unchanged at 3.75%, as policymakers grapple with heightened uncertainty stemming from the ongoing Iran conflict and its inflationary impact. Governor Andrew Bailey and the Monetary Policy Committee are likely to resist any immediate policy shift, instead focusing on scenario analysis to assess how a prolonged energy shock could affect growth, jobs, and price stability. Rising oil and gas costs have disrupted the prior disinflation trend, with evidence mounting that higher input prices are feeding through to consumers. While markets have flirted with pricing in rate hikes, most economists expect a cautious hold, reflecting limited clarity on the duration of the shock and still-fragile labour market conditions. Communication will be key after March’s market volatility, with officials expected to strike a more balanced tone, acknowledging upside inflation risks while avoiding signals that could trigger another sharp repricing.