Although UK inflation fell in June, the Bank of England held interest rates steady as renewed conflict in the Middle East and volatile energy prices clouded the outlook.
The Bank of England kept its key interest rate on hold at 3.75% for the fifth time this year on Thursday after a bigger-than-expected drop in the inflation rate last month gave policymakers breathing space to assess the fallout from renewed fighting in Iran.
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Interest rates are currently at their lowest level since January 2023, with analysts having expected the BoE to keep rates steady despite a fall in inflation in June.
Although inflation has been easing, renewed hostilities between Iran and the US in the Middle East have fuelled concerns that energy prices could rise again.
Monetary policy committee split on interest rates
The Bank’s Monetary Policy Committee voted 6-3 to keep the rate at 3.75%, in line with the expectations of most economists. Policymakers have kept the rate at that level since December after four rate cuts in 2025.
The split decision highlights growing tensions among central banks around the world about how to respond to stubbornly high inflation and concerns that the war in Iran will lead to another round of price increases.
The US Federal Reserve on Wednesday kept its key rate within a range of 3.5% to 3.75%, with Chair Kevin Warsh saying the Fed “will not hesitate to act” to keep inflation under control.
“The market is pricing in at least one interest rate rise in the UK this year, and with three members voting for an increase today and events in the Middle East showing no sign of easing the pressure, this won’t change,” Richard Carter, head of fixed interest research at Quilter Cheviot, said in an email note.
He added: “The new government has made the cost of living its number one priority and initial announcements will help lower inflation marginally, but not by enough to really make a difference to interest rates.”
UK inflation falls, but geopolitical tensions remain
Consumer price inflation in the UK slowed to 2.6% in the 12 months to June from 2.8% the previous month, according to the latest figures from the Office for National Statistics. While the drop was bigger than economists expected, inflation remained above the Bank’s 2% target for a 21st consecutive month.
Renewed attacks by the United States and Iran in the Middle East sent oil prices soaring this month amid concerns about disruption to shipping through the Strait of Hormuz, through which around one-fifth of global oil consumption and liquefied natural gas trade passed before the war.
Brent crude, the benchmark for world oil prices, rose to more than $100 (€87.2) a barrel on 23 July, from less than $71 (€61.9) three weeks earlier, as the ceasefire between the US and Iran broke down. Brent crude traded at around $91 (€79.3) a barrel on Thursday.
In Britain, economists are also closely watching the tax and spending policies of new Prime Minister Andy Burnham to assess whether his efforts to shield consumers from rising prices and spur economic growth are likely to add to inflation.
