Bank of England holds interest rates firm after Trump’s US-Iran deal and UK inflation boost
The Bank of England (BoE) voted to keep interest rates steady at 3.75 percent following the peace deal in Iran and the UK’s lower-than-expected inflation data.
Four cuts in 2025 kept the base interest rate moving towards an expected level of close to 3 percent this year, but the Iran war and subsequent oil price increases derailed that target, with the Monetary Policy Committee voting for four consecutive rate cuts.
The 7-2 vote highlighted that some members still thought raising interest rates to combat inflation was a less risky course of action, but unstable oil prices and a lack of uncertainty about what would happen next in the Middle East made it difficult to predict exactly what the overall impact would be.
The bank stated that although inflation has fallen, they expect it to rise this year with the chain effects of the increase in energy prices, but if businesses can keep their wage increase demands under control, the low demand for workers may limit the impact.
There were fears that the interest rate might have to rise once again to cushion the effects of inflation. However, this has been suppressed for now due to the framework of the peace agreement between the US and Iran and local data showing that the economy is more resilient than expected.
This has led to some suggestions that mortgage interest rates could fall rapidly in the near future, although the BoE’s interest rate remains unchanged for now.
While Barclays is cutting two- and five-year home prices starting Friday, Santander is also among those making discounts on some deals.
The BoE has a government-defined mandate to manage and control inflation at 2 percent, and interest rates are one of the primary tools it uses to do this. On Thursday, the MPC said it was “ready to act as necessary to ensure that CPI inflation remains on track to reach the 2 percent target in the medium term.”
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
David Bharier from the British Chamber of Commerce (BCC) reacted to the postponement of the votes this time and said that “this is a common sense call, considering yesterday’s better than expected inflation data and falling oil prices after the US and Iran signed a peace agreement.”
Aberdeen deputy chief economist Luke Bartholomew added that broader economic figures point to the BoE’s plan to remain at 3.75 per cent for the rest of 2026.
“The two votes for the hike show that some policymakers are still concerned about underlying inflation pressures. But with the recent decline in energy prices and the softer inflation data released yesterday, events are playing out in line with, and potentially even better than, the Bank’s scenario A at the last meeting, which was consistent with keeping interest rates steady this year,” he said.
George Brown, senior economist at Schroders, said the BoE was “playing for time” and “the bar is high for hikes” but warned MPC members not to become complacent if inflation starts to rise.
Victor Trokoudes, CEO of Money app Plum, stated that one reason for not making changes at this stage is that the BoE is “entering an energy crisis with the base interest rate”. [already] “It is slightly above policymakers’ estimates of the neutral level, which neither increases nor reduces inflationary pressure.” Mr Trokoudes also agreed with the assessment that the PPC will try to keep interest rates at the current level for as long as possible this year.
If so, it would represent a boost for savers, who have been encouraged by Atom Bank’s head of savings Aileen Robertson to revisit their bank accounts to ensure their cash is earning a strong interest rate well above inflation.
“For savers, this pause should be seen as a call to action. We have been experiencing changes in interest rate expectations for a long time, but competitive returns are still on the table right now,” he said.
“The mistake savers make in a holding model is to do nothing. If you leave your cash in a low-yielding high street account, you’re likely to actively lose money to inflation. As rates are fixed for now, it’s an ideal time to review your options, consider connecting to a strong fixed-rate saver, or use your Cash ISA allowance with a provider that transfers value back to the customer.”
Many savings accounts now offer around 4.5 percent or more, as do fixed-rate bonds; In regular savings accounts, we can see that consumers earn about 7 percent of their cash at the best points.
Meanwhile, Scott Clay, director of property lender Together, said the rate call “could signal a turning point for the property market” and pointed out that recently falling interchange rates were affecting mortgage prices.
In late April, the bank warned that inflation could rise significantly this year in a worst-case scenario, but some economists already predict the UK may have avoided that outcome.
Even so, there is a strong possibility that food prices will rise throughout the year and the energy price cap will rise for three months from July.
This does not mean the MPC will vote to raise interest rates in the future – the next meeting is on July 30 – as a wider range of factors also play a role in the decision, including economic growth, employment and wage growth, and services inflation.
One expert predicts the next step will actually be a cut, but Governor Andrew Bailey said the Bank would monitor economic indicators before deciding on a renewed approach, with no set path for interest rates set.
The minutes of the June vote reiterated: “The policy stance required to achieve this will depend on the size of the shock, its duration and how it spreads through the economy.”
