Bank Of England Leaves Rate Unchanged

(RTTNews) - The Bank of England left its key interest rate unchanged on Thursday but cautioned that there is a risk of material second-round effects from the energy price shock, caused by the war in the Middle East, which could lead to future rate hikes.

The BoE Monetary Policy Committee, led by Governor Andrew Bailey, voted 8-1 to hold the bank rate at 3.75 percent.

The current rate remains the lowest since June 2023. Previously, the central bank had reduced the rate by 25 basis points each in August and November last year.

BoE Chief Economist Huw Pill, the sole dissenter, argued for a 25 basis-point rate hike at the latest policy meeting.

Pill said a prompt but modest hike in interest rate will help mitigate upside risks to price stability stemming from a re-emergence of intrinsic inflation persistence.

Policymakers judged that there were likely to be some second-round effects but the continued weakness in activity would limit the strength of these effects.

At the press conference, Bailey said the longer the war in the Middle East lasts, the impact on the U.K. economy will be worse.

"Where we go from here will depend on the size and duration of the shock to energy price," the BoE governor said.

"…as the crisis in the Middle East drags on, the chances of modest tightening are rising," ING economist James Smith said. The economist expects a 'one and done' rate hike in June.

"Monetary policy cannot influence energy prices but will be set to ensure that the economic adjustment to them occurs in a way that achieves the 2 percent inflation target sustainably," the MPC said.

The BoE outlined three scenarios for energy prices due to elevated uncertainty over the Iran war.

Based on the energy futures curves, BoE staff projected U.K. inflation to decline to 3.1 percent on average in the second quarter of 2026, before rising back to 3.3 percent in the third quarter. Inflation was expected to rise somewhat further in the fourth quarter.

"Holding the interest rate at 3.75 percent was the sensible call given the current geopolitical situation," British Chambers of Commerce Head of Research David Bharier said.

"Rate rises increase borrowing costs and suppress investment and demand; this could amplify job losses and further weaken growth," Bharier added.