Bank of England Holds Interest Rates at 3.75%

The Bank of England maintained its base interest rate at 3.75% following the Monetary Policy Committee meeting on Thursday. Eight members voted to hold rates, while one member voted for an increase to 4%. This marks the third consecutive meeting with no change, after reductions from 5.25% since 2024.

Inflation rose to a three-month high of 3.3% last month, driven by higher petrol and diesel costs. The bank aims to keep inflation at a 2% target set by the government. Raising rates is the primary tool to curb inflation, and policymakers noted that deviations from the target increase the likelihood of rate hikes.

The ongoing war in the Middle East has disrupted global oil and gas supplies, blocking the Strait of Hormuz shipping route and involving attacks on facilities in Qatar. This has pushed up wholesale energy prices, affecting UK fuel costs and contributing to inflation.

The bank highlighted secondary effects on energy-intensive industries, including the food sector, where inflation could reach up to 7% due to higher fertiliser costs. The New York Times reported that both the Bank of England and the European Central Bank held rates steady, as officials assess potential long-term damage from a prolonged energy shock.

“The MPC should not wait for impacts from second-round inflation before tightening monetary policy.”

The bank outlined three scenarios for the economy, all projecting higher-than-expected inflation. In the most benign case, with a swift conflict resolution, inflation could peak at 3.6%. An extreme scenario with sustained high oil and gas prices could see inflation rise to 6.2%, not returning to 2% within the forecast period.

All forecasts indicate GDP growth slowing to 0.7% or 0.8% this year, with a smaller recovery in 2027. Unemployment is projected to peak at 5.5% or 5.6% in various scenarios.