The Bank of England’s monetary policy committee voted 6-3 to hold its key base rate steady at 3.75%, citing concerns about geopolitical tensions affecting global energy markets. The decision came amid warnings that an extended conflict in the Middle East combined with elevated oil prices could drive UK inflation to 4.5% by mid-2027, adding pressure on already-strained household budgets.
Governor Andrew Bailey emphasized that the Bank was not moving toward raising rates, pointing to weak economic growth prospects and a loose labor market as factors that would naturally reduce inflationary pressures over time. He noted that official figures showed UK inflation had fallen to 2.6% in June, down from a peak of 3.8% earlier in the year. The Bank highlighted that conditions preceding the current conflict were more stable than during previous global shocks, including the pandemic and Russia’s 2022 invasion of Ukraine.
Three committee members dissented from the decision, voting to raise rates immediately to 4%. External economists Catherine Mann, Megan Greene, and Bank Chief Economist Huw Pill expressed concerns about inflation risks, with Greene and Pill having previously advocated for a rate increase at an earlier meeting. Financial markets had priced in a greater than 90% probability of unchanged rates, though investors anticipate borrowing costs could reach 4% before year’s end.
The decision provides support for Prime Minister Andy Burnham’s recently announced cost-of-living assistance package, which includes plans to reduce electricity bills and implement a £2 cap on bus fares. The Bank acknowledged these measures would modestly lower headline inflation. Looking ahead, the central bank’s baseline forecast assumes oil prices will fall to approximately $71 per barrel, with inflation peaking at roughly 3.2% later this year, though economists cautioned that outcomes remain heavily dependent on how Middle East tensions develop.
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