The Bank of England has held its key interest rate at 3.75% for the fourth consecutive meeting, as policymakers weigh inflation risks against economic growth concerns. The decision, announced on Thursday, was supported by seven of nine Monetary Policy Committee (MPC) members, while two voted for a 0.25% increase to 4%. The hold comes amid global energy price volatility linked to the Iran conflict, which has pushed inflation higher in the U.K. and other economies.
Inflation held steady at 2.8% in May, according to the Office for National Statistics, though economists warn the drop may be temporary. The U.K. economy shrunk by 0.1% in April, and the energy price cap is set to rise by 13% later this summer, which could drive inflation back up. Despite this, markets still expect a rate hike by year-end, with traders pricing in a 96% chance of no change ahead of the meeting.
Mortgage rates have been falling over the past month, with lenders like Nationwide cutting rates in response to lower Sonia swap rates, which track future interest rate expectations. The average two-year fixed mortgage rate has dropped from 5.89% in April to 5.6%. Analysts note that lenders are beginning to pass on some of these savings to borrowers.
The Bank of England’s decision aligns with other central banks, including the Federal Reserve (3.5%-3.75%) and the European Central Bank (ECB), which recently raised rates in response to the energy crisis. The Bank of Japan also lifted its policy rate to a 31-year high of 1%. The MPC must balance inflation control with the risk of slowing economic growth and unemployment, which can result from prolonged high rates.