The Bank of England's Monetary Policy Committee (MPC) voted on Thursday to keep interest rates steady at 3.75%, where they have been since December. This marks the fifth consecutive meeting without a rate change. Deputy Governor Clare Lombardelli is among the MPC members who recognize the elevated inflation pressures, particularly those stemming from the five-month closure of the Strait of Hormuz due to the Iran war and the resulting volatility in oil prices, which recently spiked above $100 a barrel. Chief Economist Huw Pill and external member Megan Greene are also expected to have voted for a rise, with external member Catherine Mann noting that falling market borrowing costs could hinder inflation control.
Despite the MPC's decision to hold rates, rate futures markets indicate expectations of a quarter-point hike by November and another by March 2027. This contrasts with most economists polled by Reuters, who anticipate rates remaining at 3.75% throughout the year and do not foresee a change. Some economists, like UBS's Anna Titareva, even project rate cuts in February and April 2027. The BoE's decision provides relief to new Prime Minister Andy Burnham, who has prioritized cost-of-living measures, including plans to scrap a tax on household electricity bills.
The BoE has revised down its inflation forecasts, helped by a 0.1 percentage point downward pressure from the electricity tax cut. Last month, the forecast for peak inflation this year was lowered to just over 3.25% from an April prediction of 3.6%-3.7%. Inflation in June reached a 15-month low of 2.6%, partly due to regulated household energy bills lagging market prices, and private-sector wage growth was also at its weakest since 2020 at 2.9%. The BoE also slowed the pace of bond holding reductions in 2025 to £70 billion ($93 billion) from £100 billion, with financial market participants anticipating a further slowdown to £50 billion in September.
