Bank Of England Keeps Rate Unchanged As Expected

(RTTNews) - The Bank of England left its key interest rate unchanged on Thursday as inflation slowed unexpectedly and unemployment declined, and US-Iran peace deal eased inflation fears.

The Monetary Policy Committee, led by Governor Andrew Bailey, voted 7-2 to hold the bank rate at 3.75 percent, which is the lowest rate since June 2023.

Previously, the central bank had reduced the rate by 25 basis points each in August and November last year.

Policymakers Megan Greene and Huw Pill preferred a quarter-point rate hike, citing the significant uncertainty about the extent of second-round effects.

The announcement came a day after the U.S. Federal Reserve left its interest rate unchanged citing its dual goals of maximum employment and inflation at the rate of 2 percent over the longer run.

Earlier on Thursday, the Swiss National Bank kept its interest rate unchanged at zero percent as inflation remained within the target.

Last week, the European Central Bank became the first major central bank to raise rates in response to the rising inflationary pressures due to the war in Iran as it delivered a 25-basis point hike to 2.25 percent, which was the first tightening in nearly three years.

The Bank of Japan raised its benchmark interest rate to 1 percent this week to the highest level since 1995.

Although the U.K. inflation eased to 2.8 percent in May, the rate is expected to rise later this year as the effects of higher energy prices continue to pass through.

The MPC observed that the policy stance required to achieve the 2 percent inflation target sustainably will depend on the scale and duration of the energy shock, and how it propagates through the economy.

Taking into account risks to the economic outlook, the committee judged that it is appropriate to maintain the interest rate at this meeting.

ING economist James Smith said the next move is likely to be a rate cut in 2027. If the Iran deal holds and energy prices stay at current levels, inflation is expected to peak at 3.5 percent later this year, the economist observed. That is comfortably below a 4 percent threshold, which BoE research indicated more likely to trigger a persistent bout of price pressure when breached, he added.

"Holding the interest rate at 3.75 percent is the common-sense call, given yesterday's better-than-expected inflation data and falling oil prices after the USA and Iran signed a peace deal," British Chambers of Commerce Head of Research David Bharier said.

Bharier observed that if the ceasefire holds and the Strait of Hormuz fully reopens, falling oil prices should help offset the inflation spike expected later this year. But caution is still needed, he added.

The Confederation of British Industry Deputy Chief Economist Alpesh Paleja said the MPC's focus has now shifted towards digesting the implications of the deal reached between US and Iran to extend the ceasefire and restore energy flows through the Strait of Hormuz.

With uncertainty remaining high and inflation still expected to rise, interest rates are likely to stay on hold for some time yet, Paleja noted. Nonetheless, the US-Iran deal reduces the risk of the MPC's more severe inflation scenario playing out, he said.