Bank of England keeps interest rates unchanged and expects inflation above 3.25% by the end of the year

The Bank of England (BoE) decided yesterday to keep its monetary policy rate unchanged at 3.75%, in line with analysts' forecasts, and as it has done since the beginning of the Iran war, Reuters reports, according to Agerpres.

The nine members of the BoE's Monetary Policy Committee voted 7 to 2 to maintain the current borrowing cost, with only chief economist Huw Pill and an external member, Megan Greene, in favor of raising the interest rate to 4%.

The decision comes a day after the US Federal Reserve (Fed) kept its benchmark interest rate at a range between 3.50% and 3.75%, while last week the European Central Bank (ECB) raised its benchmark interest rate for the first time in three years.

"For now, the BoE is trying to buy time rather than attack. We think there is a good chance that an interest rate hike will follow,” said George Brown, an economist at fund manager Schroders.

Britain has been hit harder than other Western countries by the effects of the Middle East war, due to its dependence on imported natural gas. Even though the US and Iran have signed a preliminary agreement to put out the fire, BoE officials said it was too early to proclaim the end of the threat to inflation.

"Whatever happens in the future, higher energy prices over the past four months show that there are already inflationary pressures,” said BoE Governor Andrew Bailey.

The inflation rate in Britain unexpectedly held at 2.8% in May, the Office for National Statistics (ONS) announced on Wednesday. Economists polled by Reuters had expected inflation to be 3% last month, with the effects of the Middle East war keeping the UK inflation rate almost a percentage point higher than the BoE had forecast in February.

The Bank of England said on Monday it expected inflation to exceed 3.25% by the end of the year after forecasting a range of 3.6% to 3.7% in April. It also forecast the UK economy to grow by 0.2% this quarter, down from a previous forecast of 0.1%.

For most of the past five years, UK inflation has been above the BoE's medium-term target of 2%.

Data released last week by the ONS showed the UK economy contracted by 0.1% in April, the first monthly decline since August, as the impact of the Middle East war weighed on the economy. UK GDP grew by 0.3% in March and 0.4% in February. The dominant services sector fell by 0.2% in April, led by weak performance in arts, entertainment and recreation, as well as administration and support services, the ONS data showed.

An ONS official said there was evidence that the cancellation of sporting events in the Middle East had affected British businesses in the sector. The conflict led to the cancellation of Formula 1 Grand Prix races in both Bahrain and Saudi Arabia. Tennis and football competitions were also cancelled.

The International Monetary Fund expects the UK economy to grow by 1.3% in 2026, a similar level to 2025.