Bank of England holds rates steady as easing oil prices temper inflation risk

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Bank of England holds rates

Highlights

The Bank of England's MPC votes 7-2 to hold interest rates at 3.75 per cent, as easing oil prices reduce immediate inflation risk.
UK inflation remains at 2.8 per cent in May, above the BoE's 2 per cent target, while Governor Bailey signals potential rapid response to rising price pressures.
Sterling is down 0.5 per cent to $1.323 after the rate decision, and swaps markets continue to price in one quarter-point BoE rate rise by year-end.

Policy decision and inflation backdrop

As reported by Financial Times, the Bank of England’s Monetary Policy Committee votes seven to two at its Thursday meeting to leave interest rates unchanged at 3.75 per cent. The hold follows a decline in oil prices after last weekend’s deal between the U.S. and Iran, which helps ease inflation risks tied to disruption in the Strait of Hormuz.

Chief economist Huw Pill and external member Megan Greene dissent, calling for an immediate quarter-point increase to limit the risk that higher energy costs feed through into wages and company pricing. Oil prices surge after the conflict erupts in late February as transit through the key shipping route is restricted, though prices fall after the ceasefire extension.

UK inflation unexpectedly holds at 2.8 per cent in May, remaining above the BoE’s 2 per cent target. Governor Andrew Bailey says he is willing to tolerate above-target inflation temporarily, but adds that he will respond promptly if broader price pressures begin to build.

Market reaction and outlook for UK rates

Bailey says recent falls in oil prices are encouraging, but notes they remain above pre-war levels. He adds that the higher energy prices of the past four months mean some inflationary pressure is already moving through the economy.

George Brown, senior economist at Schroders, says the BoE is choosing to wait rather than tighten policy immediately, despite concerns among more hawkish members about rising inflation expectations. In currency markets, sterling is little changed after the widely expected decision and vote split, standing down 0.5 per cent on the day at $1.323.

Traders in swaps markets continue to price in one quarter-point BoE rate rise by the end of the year, with a smaller possibility of a second increase. That suggests investors still see further tightening as possible if energy costs or domestic inflation pressures strengthen again.

Our earlier coverage of the Bank of England’s June rate decision highlighted the MPC’s 7–2 vote to keep the benchmark rate at 3.75% while policymakers assessed persistent inflation risks tied to elevated energy prices. We noted that the two dissenters argued for an immediate hike to better anchor inflation expectations, while the majority favored a wait-and-see stance with future moves dependent on whether energy costs spill over into broader price pressures.

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