The Bank of England has kept interest rates unchanged at 3.75%, as policymakers continue to assess the economic impact of the ongoing conflict with Iran. The decision, widely anticipated by markets, comes despite weaker-than-expected inflation data for May, which remained at 2.8%.
Energy Costs and Inflation Concerns
Higher energy costs resulting from the closure of the Strait of Hormuz, a critical maritime route, are expected to push inflation higher and slow economic growth. This presents a difficult balancing act for the Bank's Monetary Policy Committee (MPC), which must weigh rising costs against the risk of stalling the economy.
The Bank's cautious approach contrasts with the European Central Bank's decision to raise rates in the eurozone last week. Meanwhile, a memorandum of understanding between Donald Trump and Iran has raised hopes that oil supplies could resume soon.
Rate Cuts and Economic Outlook
The Bank of England had cut rates six times since mid-2024, with further cuts anticipated before Trump's Operation Epic Fury led Iran to choke off oil supplies from the Gulf. Weaker-than-expected inflation had raised hopes that the conflict's impact on economy-wide prices might be less severe than feared.
Jobs Market and Wage Growth
However, the latest official snapshot of the UK jobs market, published on Thursday, may have raised concerns among policymakers. Wage growth was stronger than expected at 4.4% including bonuses, and unemployment fell. The MPC closely monitors wages amid fears that rising prices could feed 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.
