US and UK central banks expected to keep interest rates on hold amid Iran peace deal | Interest rates
Central banks in the US and UK are expected to keep interest rates steady this week as the peace deal in the Middle East is expected to ease inflationary pressures.
The US Federal Reserve is expected to keep its benchmark interest rate in a range of 3.5% to 3.75% on Thursday; This will be the first policy decision under Kevin Warsh, the new Fed chairman and Donald Trump’s pick.
Investors will be watching Warsh’s comments at the press conference following the decision for clues about his views on the likely course of U.S. inflation and the broader economy. Inflation in the world’s largest economy rose from 2.4 percent in February to 4.2 percent in May, the highest level in three years.
Before Trump struck a new deal with Iran over the weekend, Warsh was under increasing pressure to raise interest rates in response to rising prices – against the president’s wishes – but he is expected to say opening the Strait of Hormuz would ease inflation for the rest of the year.
Although UK inflation is above the 2% target at 2.8%, the Bank of England (BoE) is expected to keep interest rates at 3.75%.
Analysts said most of the Bank’s nine-member monetary policy committee will take a “wait-and-see” approach before reacting to the deal when they meet on Thursday, leading to a sudden drop in oil prices. Financial markets are currently still pricing in another rate hike in the UK in December this year.
ING economist James Smith said it was unclear how long the peace agreement would last. “But if the deal goes ahead and oil starts flowing again, inflation in the UK will likely remain below 4%, allowing the Bank of England to avoid raising rates this summer,” he added.
Last week, the European Central Bank (ECB) raised interest rates from 2% to 2.25% after euro zone consumer price inflation rose from 3% in April to 3.2% in May 2026.
High energy prices are starting to trickle down to other parts of the economy, European Central Bank President Christine Lagarde said on Monday.
“We have definitely started to see the indirect effects of inflation almost everywhere in recent weeks,” Lagarde told French radio.
“We absolutely have to take action when we start to feel second-round effects (especially wage increase risks) emerging,” he added.
Authorities are known to be concerned that conflicts in the Middle East are already encouraging aggressive wage bargaining, forcing manufacturers and retailers to push for price increases into the summer and autumn to maintain profit levels. Like the BoE and the Fed, the ECB’s inflation target is 2%.
Bank of England Governor Andrew Bailey said last week that pressure had eased on the monetary policy committee to raise borrowing costs after commercial lenders increased loan and mortgage rates.
