Bank of England keeps interest rates at 3.75% as Iran conflict weighs on economy
Higher energy costs due to the closure of strait of Hormuz are expected to boost inflation and slow UK growth
Bank of England policymakers have left interest rates on hold at 3.75%, as they continue to weigh the impact of the Iran conflict on the economy.
The decision had been widely expected, even before Wednesday’s inflation figure undershot forecasts to remain at 2.8% in May.
Higher energy costs as a result of the closure of the strait of Hormuz – a key maritime choke point – are expected to boost inflation and slow UK economic growth, giving the Bank’s monetary policy committee a difficult balancing act.
The committee’s cautious approach, in contrast to the European Central Bank’s decision to raise rates in the eurozone last week, comes as Donald Trump’s memorandum of understanding with Iran raises hopes that oil supplies could soon be flowing again.
The Bank of England had cut rates six times since mid-2024 and was expected to continue doing so, before Trump’s Operation Epic Fury led to Iran choking off oil supplies from the Gulf.
Weaker-than-expected inflation raised hopes that the effect of the conflict on economy-wide inflation might be less severe than feared. However, the latest official snapshot of the UK jobs market, published on Thursday, may have raised some concerns among policymakers.
Wage growth was stronger than expected, at 4.4% including bonuses, and unemployment fell. The MPC watches wages closely, amid fears that rising prices could feed through into higher pay and entrench inflation.
On Wednesday, the Federal Reserve kept US interest rates on hold at a range of 3.5% to 3.75%, where they have been since December.
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