Policymakers at the Bank of England have kept interest rates at 3.75%.
As predicted by experts, the Monetary Policy Committee (MPC) held rates like they did last month as the Middle East war continues to cause uncertainty for the UK economy.
Eight of the nine MPC members voted for a hold with one backing a rise.
In the notes accompanying its decision, the Bank said a worst case scenario is inflation reaching a high of 6.2% and interest rates at 5.2% this year if the Middle East war has a prolonged impact on energy.
“CPI inflation has increased to 3.3%, and is likely to be higher later this year as the effects of higher energy prices pass through”, it said.
“There is a risk of material second-round effects in price and wage-setting, which policy would need to lean against. But the labour market continues to loosen, and a weakening economy could contain inflationary pressures.”
The MPC also said:
“War in the Middle East is disrupting the transportation and supply of energy, raising its price and pushing up households’ motor fuel costs; we expect utility bills to increase as well.
“We expect energy price rises to have knock-on effects; as businesses’ bills go up, it is likely they will increase their own prices to cover the cost; workers may ask for higher wages as their bills also rise.
“The impact on the economy and inflation will depend on how much energy prices go up and how long they stay raised; it will also depend on how much pressure businesses feel to increase wages and prices.”
Despite the challenges, the Bank said “whatever happens, we will make sure that inflation returns to the 2% target”.
Commenting on the decision, chancellor Rachel Reeves said:
“The war in the Middle East is not our war, but it is one we have to respond to.
“Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we’ve seen in the past that resulted in higher inflation and higher interest rates.
“We entered this conflict in a stronger position because of the choices this government took to build economic stability, and we are going further to take back our energy security, backing British industry and protecting households, to build a Britain that is stronger, more resilient, and prepared for the future.”
Interest rates held at 3.75%: Reaction from business groups and others
David Bharier, head of research, British Chambers of Commerce:
“Holding the interest rate at 3.75% was the sensible call given the current geopolitical situation. The MPC is right to emphasise that monetary policy can not address the root cause of this shock – rising global energy prices. However, the Bank signals that future rate rises are possible if the conflict persists.
“The Bank of England is navigating a fundamentally different landscape to the economic shock in 2022. Back then, raising rates was a blunt but available tool. Today, with growth weakening and unemployment rising, the same lever risks causing greater damage.
The Bank’s forecast, which takes into account our own data, points to growth of just 0.7% this year, underlining the current economic fragility.
“Our research shows labour costs have been the top cost pressure for businesses since the October 2024 Budget, cited by three-quarters of firms. At the same time, AI adoption among SMEs is accelerating as firms look for competitive advantage.
“Rate rises increase borrowing costs and suppress investment and demand; this could amplify job losses and further weaken growth.
“Businesses cannot afford policy drift. Targeted support on energy and other business costs will provide initial relief, but lasting resilience requires a step-change in investment, productivity and export growth. The government must use next month’s King’s Speech to set that direction.”
Sachin Agrawal, managing director, Zoho UK
“UK businesses are being squeezed by significant cost pressures and the hold of interest rates is another added challenge to an already turbulent economy caused by geopolitical uncertainty. In this climate, businesses are placing greater emphasis on rethinking operations to prioritise productivity and ROI in order to tread water. Elevated borrowing costs and ongoing cost-of-living pressures are reinforcing this more measured stance.”
Neil Rudge, chief banking officer, Shawbrook:
“The Bank of England has chosen to hold rates this month, resisting pressure to act on rising energy costs linked to ongoing geopolitical tensions. This will be a welcome decision for UK businesses, many of which are already dealing with higher costs and continued supply chain disruption.
“Whilst there is still uncertainty around how these pressures will evolve, business activity doesn’t stand still. Leaders need to stay agile and make decisions in a constantly shifting environment. In this context, the role of lending partners becomes even more important, with access to external funding often making the difference between simply managing and being able to pursue growth.”
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