Bank of England Keeps Interest Rates on Hold
Today, the Bank of England’s (BOE) Monetary Policy Committee (MPC) in a split vote, voted 6 – 3 to keep interest rates on hold in a range of 3.5% – 3.75% for the fifth time in a row. The three members of the MPC who voted to increase interest rates by 25 basis points, to 4.00%, were external members: Catherine Mann, Megan Greene and Chief Economist Huw Pill. Once again, officials reiterated earlier statements, and maintaining guidance stressed that “the panel were ready to act” to halt lingering inflation.
UK officials are signalling that domestic price pressures are easing quicker than earlier predictions, despite tensions in the Middle East with an ‘on-again off-again’ war where currently, Iran and the USA have reopened hostilities. BOE officials further noted that there were clear signs of easing on the domestic inflationary front. They also highlighted evidence suggesting that higher prices and increased wage demands resulting from the energy shock were indeed scarce.
BOE Governor, Andrew Bailey, said after the meeting that, “There is little evidence of second round effects, although it is too early to take much comfort in that. Holding bank rate is appropriate as global conditions look to be more uncertain and inflationary, while domestic conditions are, on balance, more benign as regards the prospects for inflation”. Given the tone of the Governor’s take on today’s decision, experts suggest that the core of the MPC appear to be nowhere close to voting for an increase in rates.
Some analysts believe that the committee could change their thinking if energy prices increase,second-round inflationary effects materialise, or the Middle East conflict escalates. Officials noted that inflation is currently below the level that the central had previously predicted, but the bank does expect that in the coming months, the economy will witness an increase in price growth. This means consumers will experience an increase in household energy bills alongside a fresh rise in costs at the fuel pumps.
The BOE has issued a number of inflation forecasts showing differing scenarios for the cost of oil and gas. First, they restored their original forecast from April, which was based on a prediction through to the 20th of July pointing to inflation hitting 3.2% by close of business 31st December 2026, before returning to circa 2.00%, the bank’s benchmark target in 2027. The second scenario which shows Brent Benchmark crude hitting the $100p/bl mark and remaining above that mark shows a pessimistic prediction of inflation reaching the 4.5% mark in Q2, 2027. The third scenario by Q2, 2027, shows inflation peaking at 3%, with a downgraded prediction of second round effects* if there is a faster resolution to the current conflict in the Middle East.
*Second Round Effects – In these scenarios, second round effects are price and wage-settings stemming from the current shock that have the potential to raise Eurozone inflation beyond the near-term in a persistent manner.
Interestingly, in all of the above scenarios, GDP growth is predicted to be circa 1% in 2026 and 2027, before gaining some positive traction in 2028. Experts suggest that the MPC’s concerns on second-round effects appear to have receded as there seems to be a more dovish attitude, suggesting that inflation will not negatively impact broader inflation. After the rate hold, the swaps and futures markets have trimmed their expectations for an increase in interest rates at the upcoming policy meeting on 17th September 2026, pricing in a roughly 40% implied chance for an increase in rates.
