In its June 2026 meeting, the Bank of England's Monetary Policy Committee (MPC) voted 7-2 to maintain the interest rate at 3.75%. This decision came as a recent fall in oil prices, with crude dropping below $80 a barrel for the first time in three months (down from a peak of $108), provided an encouraging sign for the inflation outlook. Governor Andrew Bailey noted the encouraging fall in oil prices but cautioned that the situation remains unpredictable, with a risk of extended high energy prices. The MPC also lowered its peak inflation projection for the year to 3.25%, down from its April projection of 3.6%-3.7% in some scenarios.
Two members, chief economist Huw Pill and external member Megan Greene, voted for an immediate 0.25 percentage point increase in rates, pushing for a 4% Bank Rate. They expressed less confidence in the pace of underlying disinflation before the recent conflict and were concerned about second-round inflationary effects on household and firm expectations. Greene specifically stated that the central bank should "insure against the possibility of larger second-round effects until we have evidence to determine they are not materializing."
The central bank is navigating a delicate balance between controlling inflation, which at 2.8% remains above its 2% target, and supporting economic growth amidst high joblessness and weak GDP. The MPC emphasized that "weakness in demand and the labor market was likely to lessen the strength of second-round effects." Despite the recent US-Iran truce that has calmed oil markets, the Bank stressed that the outlook for energy prices remains uncertain and that "inflationary pressure in the pipeline" from past energy price increases still exists. Policymakers agreed that a "robust" policy response would be necessary if prices continue to creep higher, with several officials underscoring that further rate hikes are "on the cards" depending on future economic developments.
The decision aligns with expectations from many analysts and follows the US Federal Reserve's recent decision to hold rates. The Bank's move indicates an "active hold," which Governor Bailey described as an effective tightening compared to earlier market expectations of cuts. While inflation expectations for the end of the year are lower than previously thought, the Bank acknowledges that oil prices are still above pre-conflict levels and could spike again if the truce proves fragile, particularly regarding the Strait of Hormuz, which carries a fifth of global oil and gas supplies. Market pricing after the decision indicated around 35 basis points of tightening by year-end, with a 58% chance of a rate hike in September.
