The Bank of England is widely expected to hold interest rates steady at 3.75 percent on Thursday, balancing easing domestic inflation against fresh economic uncertainties driven by Middle East conflict and surging oil costs. Governor Andrew Bailey will unveil the latest decision and economic forecasts at midday.
Inflation Eases to 15-Month Low Ahead of Rate Decision
The latest official figures from the Office for National Statistics show that UK consumer price index inflation eased back to a 15-month low in June, coming in at 2.6 per cent. A slowdown in food and fuel prices provided an early positive signal for Prime Minister Andy Burnham following his prioritization of cost-of-living measures, including a move to scrap a tax on household electricity bills.
Despite that welcome downward tick, the Monetary Policy Committee faces a complex economic backdrop. The Bank of England has previously projected that inflation will climb back toward 3.25 per cent later in the year as higher energy costs feed into household bills.
Geopolitical Pressures and Oil Volatility Cloud the Outlook
Renewed hostilities in the Middle East have injected fresh volatility into global energy markets. The end of the ceasefire between US-Israeli and Iranian forces, alongside attacks on shipping in the Red Sea, pushed oil prices above 100 US dollars per barrel for the first time since May.
Thomas Pugh, chief economist at RSM UK, pointed out that energy costs will likely dictate monetary policy for the coming year. If they remain close to 100 dollars per barrel over the summer, a September rate hike would move firmly onto the table, with another in the winter likely,
Pugh said.
At the same time, Matthew Ryan, head of market strategy at financial services firm Ebury, argued that Neither current oil prices nor recent economic data warrant a hasty response, either in the form of an immediate rate hike or an overly hawkish set of communications
.
Dissenting Voices and Growth Stagnation
Not all policymakers share a cautious stance. Chief Economist Huw Pill indicated earlier this month that borrowing costs may need to climb if price growth remains stubborn. When asked if rates might increase over the next 12 months, Pill stated the short answer is yes
.
Pill also noted that demand has outstripped the UK’s productive capacity, stating I am concerned that we’ve been running the economy a little bit hotter than the supply side
according to remarks reported across financial channels. Alongside Pill, external MPC member Megan Greene, Deputy Governor Clare Lombardelli, and external member Catherine Mann are viewed by analysts as the most likely officials to push for tighter monetary policy.
Against stagnant growth — gross domestic product rebounded by only 0.1 per cent in May — rate-setters must weigh whether a hike risks stalling the broader economy.
Bond Holdings and Financial Stability Stays
Beyond the headline rate, the central bank is expected to address its quantitative tightening strategy. Following research suggesting its bond sales have exerted more upward pressure on gilt yields than initially estimated, market participants surveyed by the Bank anticipate a slowdown to £50 billion a year in September, down from the £70 billion pace set in 2025.
For households weary of economic turbulence, a temporary pause offers welcome relief. People have had more than enough uncertainty over the past year, and even a temporary pause eases the pressure a little,
noted Katie Horne from savings platform Flagstone.
Governor Bailey’s Press Conference and What Lies Ahead
Governor Andrew Bailey will address a press conference at 12:00 GMT, an hour after the central bank publishes its rate decision, policy minutes, and updated forecasts. Analysts will scrutinize his commentary for indications of how renewed Middle East hostilities have shifted inflation models.
While rate futures markets have priced in the possibility of a quarter-point hike by November, external economists generally project a hold before borrowing costs eventually ease. Anna Titareva, an economist at UBS, expects the electricity tax cut to shave 0.1 percentage points off inflation pressure, supporting forecasts that the next policy shift will be a reduction in February and April 2027 rather than an increase.
Worth a look
