The Bank of England has opted to keep its key interest rate steady at 3.75%. The decision comes as recent declines in oil prices were viewed positively, despite two policymakers dissenting and voting for an immediate 25-basis-point increase due to persistent inflation concerns.
External committee member Megan Greene joined Chief Economist Huw Pill, the sole dissenter in April, in voting to raise the Bank Rate to 4%. They cited ongoing instability in the price outlook, even in light of a recent truce agreement between the US and Iran.
The Monetary Policy Committee (MPC) left its policy guidance unchanged and revised down its forecast for the peak inflation rate in the fourth quarter of this year to 3.25%, from the 3.6% projected in April.
In a written statement accompanying the decision, Bank of England Governor Andrew Bailey noted, "Oil prices have fallen recently, which is encouraging." In a section reflecting his personal view, he added, "The situation remains unpredictable, and there is clearly a risk that energy prices could remain elevated for an extended period."
The British pound extended losses against the US dollar, trading down over 0.5% to $1.3219. Traders also slightly pared back their bets on rate hikes, with markets now fully pricing in a single 25-basis-point increase this year, while the probability of a second hike stands at approximately 30%.
"While the two votes for a hike indicate that some policymakers remain concerned about underlying inflation pressures, we believe the Bank of England will be able to avoid the kind of monetary tightening that the European Central Bank has already begun and that the Federal Reserve hinted at last night," said Luke Bartholomew, deputy chief economist at abrdn.
The meeting minutes revealed that the MPC was unanimous in its view that a "forceful" policy response would be appropriate if prices climbed further. The seven members who voted to hold rates warned of the risks of second-round effects.
The central bank is attempting to balance curbing inflation, which currently stands at 2.8% above its 2% target, with supporting economic growth against a backdrop of high unemployment and weak GDP.
The committee emphasized that "weakness in demand and the labour market may dampen the intensity of second-round effects." Official data released just hours before the Bank's announcement showed a loss of 64,000 jobs since the outbreak of the Iran conflict in February, with regular private-sector pay growth falling to a five-year low.
The MPC minutes noted that the latest employment figures "were consistent with a gradual loosening in the labour market." Despite the Bank's belief that underlying growth was 0.2% in Q1 and would remain at a similar level in Q2, GDP still contracted by 0.1% in April.
The US-Iran truce has alleviated investors' most pessimistic inflation scenarios. Oil prices this week fell below $80 a barrel for the first time in three months, down from a peak of $108 per barrel.
However, given uncertainty over the durability of the 60-day ceasefire, the Bank maintained its neutral policy guidance, stating it "will continue to monitor the situation in the Middle East closely" and that "the Committee stands ready to take whatever action is necessary to ensure CPI inflation returns to the 2% target sustainably in the medium term."
Global Central Banks Show Diverging Policy Paths
The Bank of England's decision follows the Federal Reserve's move to hold rates steady on Wednesday, though it struck a hawkish tone by warning it would not tolerate high inflation. The European Central Bank raised its own rate by 25 basis points to 2.25% this month.
The Bank of Japan increased its benchmark rate by 0.25 percentage points to 1.00% this week, marking its highest level since September 1995.
Governor Bailey, along with external members including Alan Taylor and Catherine Mann, described the Bank's policy stance as an "active" hold, where tightening financial conditions are doing some of the MPC's work for it.
At this week's meeting, a majority of MPC members judged that the tightening of financial conditions since the outbreak of the Middle East conflict "provided insurance against inflation risks." They stated this allowed the Bank to keep rates unchanged.
Prior to the attacks on Iran in February, markets had anticipated rate cuts from the MPC this year. Expectations had shifted to a hike earlier on Thursday, though market conditions have eased since March when traders were pricing in three hikes for 2026.
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