The Bank of England (BoE) is widely expected to keep its benchmark interest rate unchanged at 3.75% during its upcoming Monetary Policy Committee (MPC) meeting. This decision comes as the central bank grapples with varying inflation pressures, including a recent on-again, off-again Iran war that has impacted oil prices and closed the Strait of Hormuz for five months. Most economists polled by Reuters anticipate a 7-2 vote to maintain the current rate, a level held since December, and do not foresee any rate changes this year. However, rate futures markets indicate a different outlook, pricing in a quarter-point hike by November and another by March 2027.
Despite the prevailing sentiment for a steady rate, the BoE faces a divergence of opinions within its own committee and among financial markets regarding future policy. While Governor Andrew Bailey has suggested that the BoE's earlier signal in March—that previously expected rate cuts were off the table due to the war—would help control inflation, some MPC members might dissent. Chief Economist Huw Pill and external member Megan Greene are expected to vote for a rate increase, possibly joined by Deputy Governor Clare Lombardelli and external member Catherine Mann.
The BoE has already adjusted its inflation outlook, lowering its forecast for peak inflation this year to just over 3.25% from an April prediction of 3.6% to 3.7%. This downward revision is partly attributed to a 0.1 percentage point reduction from a new electricity tax cut. Inflation in June also fell to a 15-month low of 2.6%, and private-sector wage growth was at its weakest since 2020 at 2.9%. The central bank will also likely keep a close eye on wage increases and non-energy-related price hikes.
In terms of quantitative tightening, the BoE slowed the pace of bond reductions in 2025 from £100 billion to £70 billion ($93 billion) annually. Financial market participants anticipate a further slowdown to £50 billion in September. The decision to hold rates steady would provide some relief to new Prime Minister Andy Burnham, who has prioritized cost-of-living measures, including the scrapping of a tax on household electricity bills. Governor Bailey will address a press conference an hour after the rate decision and new economic forecasts are published.
