On Thursday, the Bank of England kept its benchmark interest rate unchanged at 3.75%, extending a pause that began in December 2025, as policymakers balanced the inflationary impact of the Iran war with signs of economic resilience elsewhere.
Governor Andrew Bailey and his colleagues Monetary Policy Committee members were largely expected to leave interest rates on hold and take a fairly neutral stance on potential policy changes. The decision comes one day after official numbers showed UK inflation remaining stable. Consumer prices climbed 2.8% year on year in May, unchanged from April and lower below economists’ projections of 3.0%, bringing the headline rate to its lowest level since early 2025.
However, the consistent reading obscured divergent developments underneath the surface. Transport costs rose rapidly to 6.8% due to higher fuel prices and rising airfares, while food inflation fell to 2.2% and housing costs remained low. Though inflation remains above the bank’s 2% objective, the result sparked expectations that the upward pressure on prices caused by the jump in oil and gas prices following the commencement of the Iran conflict on February 28th may have been less than expected. The bank’s governor, Andrew Bailey, said the recent drop in oil prices has been “encouraging,” although they remain higher than before the war.
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