The Bank of England is poised to keep interest rates on hold for a fourth consecutive meeting on Thursday, but the decision could be a split one, with two policymakers potentially backing a quarter-point hike.
Analysts widely expect the Monetary Policy Committee to leave the benchmark rate at 3.75%, a level it has held since the last cut in December. The upheaval caused by the US-Israel war with Iran had stalled further reductions, but a US-Iran peace deal signed on Wednesday by President Donald Trump has shifted the outlook.
“Bank of England expected to hold rates at 3.75% as two officials may back a hike amid inflation and energy price uncertainty.”
Official figures published on Wednesday showed UK inflation remained at 2.8% in the year to May, lower than many had feared. The pace of food price rises slowed to a 17-month low, while transport costs rose the fastest, according to the Office for National Statistics.
The peace deal should lead to the reopening of the Strait of Hormuz, a vital waterway carrying a fifth of the world's oil and gas. Oil prices have dropped close to their lowest since the conflict began, easing the energy price shock that had prompted the MPC to signal in April that rates could rise this year.
But the reprieve may be temporary. Millions of UK households face a 13% increase in energy bills in July under regulator Ofgem's price cap, which will push up inflation over the summer. “UK inflation is expected to increase over the summer after the next Ofgem price cap in July, when we will likely arrive at peak inflation, so for now [inflation] data looks like the calm before the storm,” said Victoria Scholar, head of investment for Interactive Investor.
Some analysts predict no further rises in the benchmark rate for the rest of the year, but the situation remains highly uncertain. The European Central Bank last week raised its rate for the first time in almost three years, citing the conflict's inflation pressures. The next change in UK rates, according to some analysts, is “far more likely down than up.”