Why the Bank of England kept interest rates the same and what could happen next

The Bank of England opted to keep its key interest rate at 3.75 per cent following a split decision by its rate-setting committee on Thursday.

The move comes amid growing concerns about the economic impact of the ongoing conflict in the Middle East.

Although the main tool used by the Central Bank in the fight against inflation is to increase interest rates, the committee preferred to maintain the current level.

Rising energy prices, which are a direct result of the situation in the Middle East, are expected to increase UK inflation in the coming months, the bank said.

Increasing fuel costs; It directly affects various sectors, including production, manufacturing, energy and transportation.

The bank’s decision reflects a delicate balancing act aimed at preventing inflation from spiraling out of control while dealing with global uncertainties.

Here’s what all this means…

What happened to interest rates on Thursday?

The bank decided to keep interest rates unchanged at 3.75 percent.

Six members of the bank’s monetary policy committee (MPC) voted to keep the interest rate the same, while three members (Huw Pill, Megan Greene and Catherine Mann) voted to raise rates to 4%.

This is the fifth meeting in a row where interest rates have been held at this level, having previously fallen gradually from a peak of 5.25% in August 2024.

What does it actually mean?

The base rate helps determine how expensive it is to get a mortgage or loan.

Many lenders were cutting interest rates at the beginning of this year in anticipation of the Bank of England cutting its base interest rate, but began to raise interest rates sharply after the outbreak of conflict in the Middle East.

The recent escalation of conflicts has put upward pressure on mortgage loan rates.

However, savings rates are also linked to the interest rate and are likely to increase.

What’s going on with inflation in the UK and why is it affecting rates?

Raising interest rates is the central bank’s main way of reducing inflation; It is a measure of how fast prices are increasing over time.

The Bank’s aim is to implement policy that will help keep inflation at the 2% target rate set by the Government.

The latest official figures showed that the Consumer Price Index (CPI) inflation rate fell to 2.6% in June, from 2.8% in the previous month.

Although lower, this figure remained above the target set by the Government and the Bank.

What is inflation likely to be in the future?

The Bank of England said it expects inflation to rise in the coming months.

In the baseline scenario, inflation is estimated to peak at around 3.2 percent later this year. The main reason for this is the increase in energy prices due to conflicts in the Middle East.

However, it was also stated that if the conflict continues for a long time and oil prices rise high for a long time, inflation may rise above 4%.

Rate setters also said other factors, such as an AI-driven memory chip shortage and food supply disruptions linked to hot weather, could also contribute to higher inflation.

What else can happen in the economy?

Overall, the Bank’s key economic forecasts showed a slight improvement compared to previous forecasts.

The forecast peak for inflation was marginally lower than last month’s forecast.

The report also stated that the UK economy is on track to grow by 1.1% both this year and in 2027.

This was stronger than the 0.8% forecast this year in the Bank’s most optimistic forecast in its previous full set of forecasts in April.

The unemployment picture also improved slightly; In April, the bank predicted it could be 5.5% in 2027, but suggested it would reach 5.3% next year.

Will interest rates need to increase?

Many economists now expect interest rates to remain the same for the rest of the year.

However, financial markets have also priced in one or two increases in interest rates by the end of next year.

On Thursday, the MPC “recognized the potential need for additional policy constraints” if further pressure on inflation materializes and found that “there remains room for the outlook to change materially as events in the Middle East unfold,” according to minutes from the last meeting.

This indicates that interest rates may be increased in response to the re-escalation of the US-Israeli conflict with Iran.

What does this mean for Prime Minister Andy Burnham?

This was Andy Burnham’s first monetary policy report since becoming Prime Minister earlier this month.

He pointed out that the economic outlook has improved somewhat in recent months.

Improved growth forecasts could lead to stronger Treasury revenues and help increase the spending potential of the Prime Minister and Chancellor.