Bank of England Expected to Hold Interest Rates at 3.75% as Inflation Moderates

The Bank of England's Monetary Policy Committee is widely expected to maintain its benchmark interest rate at 3.75% at its announcement on Thursday, marking a fourth consecutive hold. This decision comes as UK inflation data released Wednesday showed a more moderate outlook than previously feared, with the annual inflation rate holding steady at 2.8% in May—below expectations and reflecting a significant slowdown in food price rises to a 17-month low.

The inflation picture has been heavily influenced by geopolitical developments in the Middle East. In April, the MPC signalled that interest rates could rise this year due to a "significant energy price shock" stemming from conflict in the region. However, US President Donald Trump announced a peace deal with Iran on Wednesday, which is expected to reopen the Strait of Hormuz—a critical shipping route that normally carries one-fifth of the world's oil and gas supplies. Oil prices have subsequently dropped close to their lowest levels since the conflict began, with traders anticipating renewed free-flowing commerce through the waterway.

Analysts believe the peace deal could dampen energy and fuel price rises, reducing the likelihood of worst-case inflation scenarios. However, the UK domestic picture remains complex. Millions of UK households face a 13% increase in their energy bills when Ofgem's price cap rises in July, which is expected to push inflation higher over the summer. According to Victoria Scholar, head of investment for Interactive Investor, UK inflation is likely to peak in July before moderating, describing current data as "the calm before the storm."

The broader economic backdrop shows rising mortgage costs for borrowers. As of mid-June, the average rate on a new two-year fixed mortgage deal stood at 5.60%, up from 4.83% at the start of March when the Iran conflict began. Five-year mortgage deals averaged 5.57%, compared with 4.95% over the same period. Some analysts predict no further interest rate rises for the remainder of the year, though considerable uncertainty persists. In contrast, the European Central Bank raised its interest rate last week for the first time in nearly three years, citing inflation pressures from the regional conflict.