Hold fire! The Bank of England kept its interest rate unchanged at 3.75% as expected, but warned of persistent upside risks to inflation.

The Bank of England held its base interest rate steady on Thursday, but clearly signaled that it stands ready to tighten monetary policy if persistently high energy prices trigger broad and sustained inflationary pressures. This stance aligns with the Federal Reserve’s decision announced the same day. The Monetary Policy Committee (MPC) voted to maintain the base rate at 3.75%, a level unchanged since December last year. Bank of England Governor Andrew Bailey stated: "It is our responsibility to ensure any rise in inflation remains temporary." Three of the nine MPC members voted in favour of raising the base rate by 25 basis points to 4%, reflecting heightened concern among some policymakers about the risk of second-round inflation effects. Following the announcement, the pound rose modestly by 0.08% against the US dollar, trading at USD 1.3376. Felix Feather, economist at Aberdeen, remarked: "This pause by the Bank of England is slightly more hawkish than expected." Widening dissent: Three members advocated raising the rate to 4% Among the nine MPC members, Megan Greene, Huw Pill, and Catherine Mann voted for a 25-basis-point increase to 4%, while the remaining six voted to hold rates steady. Greene noted that UK inflation has exceeded the target for approximately five consecutive years, and that a second chokepoint in global energy supply—this time in the Red Sea—combined with AI hardware supply-chain constraints, is imposing additional supply-side pressure on markets. She stated: "Acting pre-emptively with a rate hike could reduce the likelihood of second-round inflation taking root." Pill emphasized the "profound uncertainty" surrounding the outlook for energy prices, cautioning that this uncertainty "could persist for an extended and indeterminate period", rendering fine-tuned monetary policy adjustments perilous. He explicitly stated that raising rates now would "send a clear and unambiguous signal to markets that we are both willing and able to respond to inflationary risks arising from developments in the Gulf region."

The Bank of England turns dovish: It signals willingness to tolerate inflation temporarily above target, implying a lower probability of a June rate hike.

Bank of England Governor Andrew Bailey sent a markedly dovish signal, stating that—in light of economic weakness—the Bank can tolerate inflation remaining above its 2% target for a period of time. This statement significantly cooled market expectations for a rate hike in June. On 29 May, speaking at an economics conference in Reykjavik, Iceland, Bailey explicitly stated: "In the context of weak real economic activity and uncertainty regarding both the scale and duration of shocks, tolerating inflation temporarily above target to support the real economy is the appropriate way to manage this trade-off." He cautioned, however, that such tolerance would diminish should signs of second-round effects emerge. This statement implies Bailey is unlikely to support a rate hike at the MPC’s 18 June meeting. Market pricing quickly adjusted accordingly: interest-rate swaps now price only one 25-basis-point hike by the end of 2026, whereas just late April saw markets pricing in three hikes this year. Soaring energy prices triggered by Middle East tensions place the UK at risk of its second cost-of-living crisis in under five years. Bailey’s remarks indicate the Bank of England is now prioritising prevention of further economic deterioration—but policymakers remain on tenterhooks amid high uncertainty over the inflation outlook. Removing rate-cut expectations constitutes de facto tightening Bailey stated that, by abandoning the previously market-priced path of interest-rate cuts, the Bank has already substantially tightened monetary policy in effect. Prior to the late-February US–Israel strikes against Iran, investors had anticipated two 25-basis-point cuts—totaling 50 basis points—for the UK this year. After the outbreak of conflict, expectations flipped to an equivalent magnitude of hikes. This reversal drove UK government bond yields sharply higher, thereby increasing borrowing costs for households and businesses. "By removing the rate cuts previously expected by markets, we have already tightened policy significantly relative to market expectations—and this is already affecting the economy," Bailey said. This means that even with unchanged interest rates, the substantive tightening of financial conditions is already helping to cool inflation, thus providing justification for holding rates steady. Economic strain: Energy shock dampens both consumption and investment Rising energy prices stemming from Middle East conflict are weighing on the UK economy across multiple dimensions. Latest data show consumer spending falling, businesses deferring investment, building up inventories, and cutting staff. High energy costs, compounded by domestic political uncertainty, are clearly sapping economic momentum.

Bank of England Policymakers Set Out Views on Rates Outlook

6 days ago

The Bank of England raised interest rates to 4% citing inflationary pressure from rising energy prices. Policymakers indicated future rate paths depend on energy market dynamics and domestic inflation evidence.

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