The Bank of England has just announced it is holding interest rates at 3.75% for the fourth meeting in a row, as policymakers wait to see how high energy prices and global conflict will affect the UK economy. The decision, made by the Monetary Policy Committee (MPC) on a 7-2 vote, keeps the base rate – the tool used to control inflation – unchanged, meaning borrowing costs for millions of households and businesses will stay where they are for now.
Interest rates are the Bank of England’s main lever for keeping inflation under control. When rates are high, borrowing becomes more expensive, which tends to cool spending and slow price rises. When rates are low, borrowing is cheaper, encouraging spending and economic growth. The Bank’s target is to keep inflation at 2%. After a series of cuts that brought the base rate down from a peak, the Bank last reduced rates in December. But since then, upheaval in the Middle East has pushed up energy prices, creating new inflationary pressure and stalling further reductions.
“Explains why the Bank of England holds interest rates and the impact of energy prices on inflation.”
The background to this hold lies in global energy markets. Oil prices spiked after conflict in the Middle East, and while they have fallen in recent days – Bank governor Andrew Bailey described this as “encouraging” – they remain higher than before the conflict started. The Bank’s policymakers are worried that higher energy costs will feed through to the wider economy via prices and wage demands, keeping inflation above target for longer. Indeed, the Bank has indicated it will “tolerate a slow return” to the 2% inflation target, according to City A.M., meaning it is willing to accept a delay rather than risk damaging the economy by raising rates again.
The vote split reveals the division on the MPC: two members, Huw Pill (the chief economist) and Megan Greene, voted to raise the rate to 4%, citing uncertainty over the impact of energy prices on households and businesses. The majority, however, preferred to hold, partly because a recent US-Iran peace deal could help stabilise oil supplies. If the Strait of Hormuz – which normally carries a fifth of the world’s oil and gas – reopens fully, oil prices could fall further, easing inflationary pressure. For now, though, the Bank is in wait-and-see mode.
So why does this matter for UK readers? The base rate directly influences mortgage rates, credit card interest, and savings returns. If rates stay higher for longer, homeowners on variable-rate mortgages will continue to face higher monthly payments, while savers may enjoy slightly better returns. But the bigger picture is that the Bank is trying to balance two risks: keeping inflation in check versus stifling economic growth. Higher energy prices – from domestic gas and electricity to petrol – have already pushed up household bills, and the delayed impact means prices are still expected to accelerate in the UK. By holding rates, the Bank is essentially betting that the recent peace deal will cool energy prices enough to bring inflation back down without the need for further rate rises.
Q: How does the Bank of England's base rate affect me? The base rate is the interest rate the Bank charges commercial banks for loans. When it goes up, banks typically pass on the increase to customers, making mortgages, loans, and credit cards more expensive. When it goes down, borrowing costs tend to fall. It also influences savings rates, though banks are often slower to increase those.
Q: Why does the Bank of England care about energy prices? Energy prices are a major driver of inflation because they affect the cost of almost everything – from heating homes to powering factories and transporting goods. When oil and gas prices rise, businesses often pass on those costs to consumers, leading to higher overall price levels. The Bank fears that sustained high energy prices could cause inflation to stay above its 2% target, which would erode people's purchasing power.
Q: What is the Monetary Policy Committee (MPC) and how does it decide rates? The MPC is a group of nine officials – including the governor, deputy governors, and external economists – who meet eight times a year to set the base rate. They discuss economic data like inflation, growth, and employment, then vote. The decision is based on what’s needed to meet the 2% inflation target. The recent votes have been split, reflecting differing views on the risks posed by energy prices.
What happens next? The MPC will meet again at the end of July, by which time the impact of the US-Iran peace deal on oil supplies should be clearer. If energy prices continue to fall, the Bank may eventually cut rates. If they spike again, further holds – or even a rate rise – remain possible. For now, the message from Threadneedle Street is: we’re watching, and we’re in no hurry.