Bank of England Holds Rates as Inflation Expected to Rise Amid Geopolitical Tensions

The Bank of England's (BoE) Monetary Policy Committee (MPC) decided to keep the benchmark interest rate at 3.75% following its meeting concluding on July 30, 2026, marking the fifth consecutive meeting without a change in rates. This decision was largely in line with market expectations. Six committee members voted to maintain rates, while Chief Economist Huw Pill, Megan Greene, and Catherine Mann dissented, advocating for a 25 basis point increase to 4%.

The Bank's decision was shaped by persistent uncertainties in the global economic outlook, particularly the impact of the Middle East conflict on energy prices. Although UK inflation eased to 2.6% in June, reaching a 15-month low, the BoE anticipates inflation to rise again in the second half of the year due to higher energy costs. Oil prices climbing back above $90 a barrel have reignited global inflationary pressures.

According to the updated forecasts released in the Monetary Policy Report, the UK economy is expected to see its growth stall in the third quarter, hovering around 0%. This slowdown is primarily attributed to the adverse effects of the US-Iran tensions on demand. The Bank's central scenario projects GDP growth of 1.1% for 2026, with a similar growth rate anticipated for 2027.

Geopolitical tensions in the Middle East have led to disruptions in energy supply chains, increasing volatility in crude oil and natural gas prices. This situation poses an additional inflationary risk to the UK economy. Government measures, such as the energy price cap and new Prime Minister Andy Burnham's policies to reduce the cost of living (e.g., removing VAT from electricity bills), are also influencing the inflation outlook.

Market analysts and economists hold divergent expectations regarding the Bank's future actions. While financial markets largely priced in a rate hold for July, futures markets suggest the possibility of three further rate hikes by year-end (between September and December). This contrasts with the general expectation among economists that rates will remain unchanged through the end of the year. Analysts particularly highlight the upward impact of the Middle East risk premium on mortgage interest rates.