Bank of England holds interest rates steady
The Bank of England has maintained bank rate at 3.75%.
However, Catherine Mann joined Huw Pill and Megan Greene in voting for rates to rise.
More to follow.
Key events
Why did Catherine Mann change her vote in favour of interest rate hikes? Donald Trump’s renewed attacks on Iran were the key reason – as well as establishing “policy credibility” by raising rates when inflation rises.
In the monetary policy summary published by the Bank, she wrote:
Most indicators of nominal conditions have continued to moderate, although near-term inflation estimates skirt the inflation attentiveness threshold at which research suggests stronger second-round effects, which would build on an inflation rate that has remained above target for five years.
That said, the key change in the environment for my decision is the collapse of the US-Iran memorandum of understanding, the widening of the Middle East conflict, and the associated volatility in energy prices. This “sporadic continuance” of the conflict that I hypothesised last month appears to be the state of play.
The shocks and volatility transmit through salience and production costs to affect expectations and price setting behaviours to impart an upward ratchet to CPI inflation.
A variety of research methods concludes that Bank Rate should be higher than 3.75% to return inflation to the 2% target sustainably. Other research emphasises that the costs of leaning against upside risks that fail to materialise would be smaller than the cost of leaning too little against upside risks. Notwithstanding moderately restrictive nominal financial conditions, reinforcing policy credibility when faced with inflationary shocks implies that a 25 basis point increase in Bank Rate is appropriate at this time
Donald Trump’s renewed attacks on Iran have caused concerns that inflationary pressure may build again. But for now that has not come through clearly, leaving a majority of the Bank of England’s ratesetters content to wait before raising interest rates.
Alpesh Paleja, deputy chief economist at the Confederation of British Industries, the biggest UK business lobby group, said:
One silver lining is that the Bank is starting from a relatively more favourable position. Prior to the latest escalation, energy prices had fallen back significantly. Inflation and wage data have also come in lower than previously expected. Moreover, a looser labour market should also help limit the pass-through into broader domestic price pressures.
These competing influences on inflation mean that interest rates will likely remain on hold for now. Globally, much depends on the duration and intensity of the renewed energy price shock. Closer to home, the Bank may also wait for greater clarity on the fiscal outlook as we head towards the new chancellor’s first budget in the Autumn.
And again from Suren Thiru, chief economist at the Institute for Chartered Accountants (ICAEW), who said:
Keeping interest rates on hold is a predictably pragmatic response to the conflicting realities of softer-than-expected inflation on the one hand and renewed US-Iran hostilities threatening a fresh wave of price rises on the other.
The tighter vote split in favour of this outcome confirms a further hawkish shift within the committee with inflation worries outweighing concerns over the economy, keeping a September rate rise on the table.
There has been a bit of a move in implied interest rate probabilities: financial market investors are now pricing in a 64.3% chance there is no change at the September meeting.
That suggests the first impression is that the message is more dovish – on in favour of lower rates – than had been expected before.
The value of sterling against the US dollar has retreated slightly after the statement, although only by about a quarter cent to $1.3378. The pound is almost flat for the day against the dollar.
Richard Partington
Bank of England governor Andrew Bailey warned that events in the Middle East mean that the short-run path of inflation is uncertain owing to volatile energy prices.
Bailey was one of the six policymakers who voted to hold interest rates. He wrote:
The possibility of repeated resumptions of conflict, combined with lower than usual European gas stock levels and a fall in global refining output, mean that risks to energy prices lie to the upside. Set against that, the process of underlying disinflation that was intact prior to the conflict remains in train. That provides some tentative evidence that inherited inflation persistence may be weaker than had been presumed.
The Bank’s chief economist, Huw Pill, voted to raise interest rates, along with external policymakers Megan Greene and Catherine L Mann.
You can read more from Richard Partington, who was locked in the Bank’s basement with the statement and report ahead of time, here:
UK economic growth to slow to halt in current quarter, says Bank of England
The UK’s economic growth is expected to grind to a halt in the third quarter of this year as the effects of the US-Israeli war on Iran weigh on demand, the Bank of England said.
Its updated forecasts said underlying GDP growth is projected to slow to around 0% in the third quarter.
Economic growth for 2026 is estimated to be 1.1% under its central scenario, with 1.1% growth again in 2027 and 1.7% in 2028.
Bank of England: Inflation expected to rise later this year
The Bank of England’s monetary policy committee said that the impact of the Iran war on prices “remains uncertain”, but that inflation is expected to rise later this year.
It said:
In response to events in the Middle East, crude and refined energy prices have remained volatile and higher than pre-conflict. The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy including via financial conditions.
CPI inflation has fallen to 2.6% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through. 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. There is little evidence so far to suggest such effects, and there have continued to be clear signs of underlying disinflation in recent data.
Bank of England holds interest rates steady
The Bank of England has maintained bank rate at 3.75%.
However, Catherine Mann joined Huw Pill and Megan Greene in voting for rates to rise.
More to follow.
A quick check-in on markets before the Bank of England reveals its latest policy decision at noon UK time.
Financial markets are pricing in a 93% chance that there will be no change to the main interest rate, bank rate, which is at 3.75%.
The decision for September’s meeting is seen as much more of a toss-up though. The implied probability is only 53.6% for no change, versus 46.4% for a hike. We will watch to see if that changes after the statement and Andrew Bailey’s press conference.
Kalyeena Makortoff
The data watchdog has raided multiple properties across the UK, as part of a crackdown on nuisance marketing around the car loan mis-selling scandal.
The Information Commissioner’s Office (ICO) said it had executed a series of warrants this week, allowing it to search homes and business properties in Bolton, Burnley, Liverpool, London and Swansea on Wednesday. The watchdog said the properties were linked to five companies which are “subject to ongoing investigations” and thoughts to be responsible for sending a combined 170 million text messages to members of the public between September 2025 and May 2026.
Photos released alongside the notice on Thursday showed authorities having seized reams of mobile phones and gathering items into evidence bags.
The ICO was acting as part of a joint taskforce with the Financial Conduct Authority, Advertising Standards Authority and Solicitors Regulation Authority – which monitors the legal industry – after receiving 12 million complaints from consumers since last September, saying up to 100,000 had been received per day.
It is now urging all companies in the controversial claims management sector to ensure they were complying with privacy and electronic communications regulations, or risk raids that could result in mobile phones, laptops and so-called SIM farms.
The FCA has for months been warning consumers against using claims management companies to file claims against banks and other specialist lenders involved in the motor finance scandal, in which borrowers were overcharged due to lenders paying commission to car dealerships between 2007 and 2024.
Claims management companies and law firms charge consumers up to 30% of their payouts to file claims on their behalf.
Andy Curry, head of investigations at the ICO, said:
People are fed up with being bombarded by unwanted calls, texts and emails about car finance claims, and we’re taking action. This week’s searches send a clear message to the claims management sector: comply with the law or expect to hear from us.
We are working closely with our taskforce partners to make sure people are properly informed and protected and we will not hesitate to take further action where we find evidence of wrongdoing.
Two members of the Bank of England’s monetary policy committee voted to hike interest rates at the last meeting. They were chief economist Huw Pill and independent member Megan Greene.
But economists have their eyes on independent member Catherine Mann or possibly deputy governor Clare Lombardelli to potentially join those voting for a hike.
Bruna Skarica, Fabio Bassanin, David Adams of Morgan Stanley, an investment bank, wrote last week that they expected a 7:2 vote in favour of holding, and broadly unchanged messaging. But they said:
We concede that there is some chance that external member Mann joins Greene and Pill in dissenting and voting for a hike.
Deputy Governor Lombardelli voting for a hike would be more meaningful, we think. We would ‘package’ her vote into a broader hawkish risk scenario for next week, where forecasts, messaging, press conference and the vote split all prepare investors for a likely hike as early as September. To us, this remains a risk scenario, with our base case for Lombardelli to put forward another relatively balanced paragraph and vote with the majority.
Matthew Ryan, head of market strategy at payments firm Ebury, said:
We contend that economic data does not yet clear the bar for higher rates. Headline inflation fell to a 15-month low 2.6% in June, undershooting the bank’s forecasts for three months running.
Wage growth is softening rather than accelerating, and the economy continues to shed jobs rather than add them – consistent with a labour market showing slack, not tightening. The latest retreat in oil prices means the bank’s own forecasts may show inflation peaking closer to 3% than 4%, which we don’t think is high enough to warrant undue panic.
That’s not to say the MPC won’t strike a hawkish note on Thursday. As always, the voting pattern among the committee will be key.
‘Hawkish hold’ expected from Bank of England
The Bank of England’s monetary policy committee (MPC) will have decided whether to hold interest rates well before the US Federal Reserve announced its decision last night. However, Bank governor Andrew Bailey will be mindful of that reaction when he talks to the media later this afternoon.
The Bank’s decision is due at midday, with most economists expecting no change. But the question is whether it will be a “hawkish hold” – signalling the likelihood of future hikes.
Suren Thiru, chief economist at the Institute of Chartered Accountants (ICAEW), said:
An interest rate hold at midday looks a near certainty, as the recent run of more dovish economic data should give rate-setters enough comfort to look through the twists and turns of the US-Iran conflict for now.
While the monetary policy committee’s vote split is likely to remain 7–2 in favour of holding rates steady, elevated oil prices will likely reaffirm its hawkish stance, keeping a future rate rise on the table.
The Bank is publishing new economic forecasts in its monetary policy report. They could show an improved economic outlook, but everything will be overlaid by worries over the course of energy prices if – as seems to be the case today – Donald Trump wants to continue waging war on Iran.
Andrew Wishart, senior UK economist at Berenberg, an investment bank, said:
We expect the Bank of England (BoE) to leave its Bank Rate unchanged at 3.75% tomorrow, but threaten to raise interest rates if energy prices rise a lot more or evidence of second-round effects surfaces. This provides a convenient insurance policy for the BoE: every time the Iran conflict flares up, investors revise up their interest rate expectations and mortgage borrowing costs rise, immediately squeezing demand and reducing the risk of persistent inflation.
Some analysts say that the BoE must eventually follow through on its threat for it to remain credible. Recent history argues otherwise – immediately after the 19 March BoE meeting, the market priced in two 25pb hikes to 4.25% by this week’s meeting. Neither has materialised, yet investors continue to price in two or three hikes. We do not think that the BoE will follow through with its threat to raise interest rates for two reasons: 1) Inflation in wages and services prices – the part of inflation that the BoE can best influence – continue to trend lower. 2) We think US President Donald Trump wants to avoid high oil prices because high petrol prices would damage the Republican party’s chances in the 3 November mid-term elections.
US borrowing costs highest since global financial crisis
Lauren Almeida
US government borrowing costs have hit their highest level since 2007 after the Federal Reserve voted to hold its key interest rate steady, feeding fears that the central bank may not move fast enough to tame a rise in inflation.
The yield – or interest rate – on the 30-year US Treasury bond rose 14 basis points to nearly 5.24%, a 19-year high, after the Fed announced its decision to hold its main rate at between 3.5% and 3.75% for the fifth meeting in a row.
Kevin Warsh, the Fed chair, said the bank would “not waver” in its commitment to tackling rising prices.
A prolonged period of high inflation meant that some Americans believed the central bank had an “implicit target” above its 2% target, he added. He said:
There is no soft implicit target: not on this committee’s watch. There’s only a target and it’s 2%. This Fed will not waver … Our credibility rests on performing our duties and delivering on our responsibilities.
The decision to leave rates on hold spooked investors who are worried about the US economy’s ability to absorb a rise inflation triggered by Donald Trump’s war in Iran.
You can read the full story here:
