The Bank of England has opted to keep its benchmark interest rate steady at 3.75%, as policymakers weigh stubborn inflation against weak economic growth.
Seven of the nine members of the Monetary Policy Committee backed the hold at the BOE’s May meeting, broadly in line with economist expectations polled by Reuters.
The two dissenting voices were BOE chief economist Huw Pill and external MPC member Megan Greene, who both voted to raise the base rate by 25 basis points to 4%.
Higher energy costs stemming from the Iran war have pushed inflation upward across global economies, with the UK particularly exposed as a net energy importer.
The BOE acknowledged that while prices have eased since an initial spike, the war “makes it hard to predict what is going to happen with them.”
UK inflation held at a cooler-than-expected 2.8% in May, driven largely by rising transportation fuel costs, while the economy shrank by 0.1% in April.
The country’s energy price cap is due to rise by 13% later this summer, when energy costs are expected to hit a two-year high, making the current easing short-lived.
“The impact on the economy and inflation will depend on how long energy prices stay raised,” the Bank said, adding that it is “monitoring the situation very closely.”
Despite a diplomatic breakthrough between Washington and Tehran, markets remain priced for a rate hike by the Bank of England before the end of the year, according to LSEG figures.
US President Donald Trump and Iranian President Masoud Pezeshkian electronically signed a 14-point Memorandum of Understanding on Wednesday, aimed at laying the groundwork for a durable peace settlement to the four-month conflict.
The effective closure of the Strait of Hormuz, a critical oil shipping route through the Middle East, has kept oil prices elevated throughout the conflict period.
The Federal Reserve also held US interest rates at 3.5%-3.75%, though investors were rattled by hawkish signals at Kevin Warsh’s first meeting as Fed chair.
The European Central Bank became the first major central bank to raise rates in response to the Iran war energy crisis, with the Bank of Japan following on Tuesday, lifting its policy rate to a 31-year high of 1%.
Luke Bartholomew, deputy chief economist at Aberdeen, said: “We think the BoE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night.”
Bartholomew added: “In fact, if energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year.”
George Brown, senior economist at Schroders, warned that the BOE cannot afford complacency, saying: “For now, the bank is playing for time rather than going on the attack.”
Brown added that a softer labour market and weak growth should help limit second-round inflation effects, while progress on reopening the Strait of Hormuz could reduce extreme upside risks to energy prices.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said UK monetary policy now stands “at a crossroads,” warning that renewed hostilities could tilt the balance back toward rate hikes.