Key Takeaways

• BoE holds at 3.75%: The Monetary Policy Committee voted 7-2 to keep rates unchanged — as widely expected.
• Energy the central concern: The BoE acknowledged global energy prices have fallen since the last meeting but warned they “remain higher than pre-conflict and have continued to be volatile.”
• Iran peace deal impact: The Versailles MOU signing has contributed to oil’s slide, but policymakers flagged crude may remain elevated and volatile for some time.
• Geopolitical premium lingers: Some analysts warn a risk premium may persist in oil prices given the possibility Iran could again shutter the Strait of Hormuz.
• UK CPI at 2.8% in May: Inflation matched its 13-month low — but the BoE expects it to rise later in 2026 as energy price effects pass through.
• Q3 forecast revised down: The BoE now sees CPI “a little under 3%” in Q3 and just over 3.25% in Q4 — below the path expected in April.
• Second-round effects warning: “The risk of material second-round effects in price and wage-setting is greater the longer higher energy prices persist.”
• Labor market loosening: The BoE highlighted a weakening economy and labor market as factors that may help contain inflation.
• “Already tightened considerably”: Governor Bailey has argued the BoE tightened effectively by abandoning its planned rate cut path.
• Wait-and-see confirmed: The BoE said it is “appropriate to maintain Bank Rate at this meeting” — reinforcing its cautious, data-dependent stance.
• ECB already hiked: The Fed held and the ECB raised rates last week — illustrating diverging approaches among major central banks.
• April’s 3.5% peak forecast revised: The BoE’s new projections are more benign than its April worst-case scenario.

The Bank of England chose to keep interest rates steady as anticipated on Thursday, echoing a similar decision by the Federal Reserve this week, as policymakers warned that elevated — albeit falling — energy prices were maintaining upward pressure on inflation.

“Global energy prices have fallen since the previous meeting in response to events in the Middle East. But they remain higher than pre-conflict and have continued to be volatile. The impact of the energy shock on the U.K. economy remains uncertain,” the BoE wrote in a statement.

The rate-setting Monetary Policy Committee voted by a majority of 7-2 to leave its bank rate at 3.75%.

A Week of Global Central Bank Decisions

Like other major central banks, the BoE has been grappling with how best to respond to a surge in energy costs due to the Iran war. On Wednesday, the Fed stood pat but unveiled a hawkish policy outlook, while the European Central Bank hiked rates at a meeting last week.

Oil prices have begun to slide back down closer to pre-war levels, driven by the signing of an interim peace agreement between Washington and Tehran that would halt hostilities and reopen the Strait of Hormuz. But some analysts have flagged that crude may stay elevated for some time as the supply shock from the strait’s closure recedes. Others have suggested that a geopolitical risk premium may persist, owing to the possibility that Iran could suddenly shutter the narrow conduit once again.

UK Inflation Path Revised Lower

In the United Kingdom, recent inflation data showed consumer prices held at 2.8% in May — matching a 13-month low. However, it is expected to rise later this year “as the effects of higher energy prices continue to pass through” into the wider economy, the BoE said.

“The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist,” the BoE wrote — although it highlighted a loosening in the labor market and indications of a weakening economy that may “contain” inflation.

Inflation has overshot the BoE’s 2% target for much of the past five years, and policymakers had warned in April that the consumer price index could jump to 3.5% by the end of 2026. However, with energy and non-energy prices now lower than expected, the BoE said CPI inflation is now expected to be “a little under 3%” in the third quarter and just over 3.25% in the fourth quarter — below the path projected in April.

Wait-and-See Confirmed

Taking all this into account, the BoE said it judged that it is “appropriate to maintain Bank Rate at this meeting” — echoing the wait-and-see attitude observers had widely anticipated heading into the decision.

Previously, BoE Governor Andrew Bailey has suggested that the central bank had “already tightened policy considerably” by abandoning plans for a possible rate cut this year. He has argued the BoE has time to wait and assess the impact of the Middle East conflict, although other policymakers have flagged that businesses could still raise prices — potentially weighing on household confidence in the central bank’s ability to cap inflation.