BOE holds rates in 6-3 vote as war clouds inflation outlook

Published Thu, Jul 30, 2026 · 09:18 PM

[LONDON] The Bank of England kept interest rates steady at 3.75 per cent, as UK officials sought to balance the threat from resurgent US-Iran tensions against signs that domestic price pressures are easing more quickly than predicted.

The Monetary Policy Committee voted six-three in favour of leaving rates unchanged, with chief economist Huw Pill and external members Megan Greene and Catherine Mann voting for a quarter-point increase, minutes from its meeting showed on Thursday (Jul 30). Only Pill and Greene had supported immediate action in June.

Officials kept their options open by maintaining guidance stating that the panel “stands ready to act” to stop high inflation lingering, as it tries to navigate the wild energy-price swings of recent weeks. The unpredictable environment meant that, in the days immediately preceding the committee’s announcement, oil and gas prices were already running substantially higher than the average the bank had assumed in its central forecast just ten days before.

However, the committee said there were “clear signs” that domestic inflationary pressures are easing and “little evidence” so far that the energy shock has stoked wage demands and higher prices elsewhere. The majority of policymakers who backed no change in rates also said their strategy could change were the war to end soon, with two members saying they’d consider a cut in that event including deputy governor Dave Ramsden. 

Traders pared back bets on rate hikes following the decision and the yield on two-year gilts – among the most sensitive to changes in monetary policy – fell eight basis points to 4.37 per cent. Traders now see 35 basis points of tightening by December.

“There is little evidence yet of second-round effects, although it is too early to take much comfort from that,” BOE governor Andrew Bailey said. “Holding bank rate is appropriate as global conditions look to be more uncertain and inflationary, while domestic conditions are on balance more benign as regards the prospects for inflation.”

The conflict is entering its sixth month, with little sign that intermittent negotiations will yield a lasting peace. While inflation is running below levels the BOE had expected in the spring, price growth is expected to accelerate in the coming months, reflecting a July increase in household energy bills alongside a fresh rise in motor-fuel costs.

“For now, the Bank is not seeing enough to abandon its wait-and-see approach,” said George Brown, senior economist at Schroders. “Despite the sharp rise in energy prices, the majority appear unconvinced this will translate into more persistent domestic inflation.”

Paul Dales of Capital Economics said the BOE’s “hawkish bias hasn’t strengthened much, if at all.”

The UK central bank restored the central inflation forecast it had ditched in April and also published a “mild” and “adverse” scenario showing the different paths for oil and gas costs. 

Thursday’s central projection – which was based on a 15-day snapshot of energy prices through July 20 – pointed to UK inflation peaking at 3.2 per cent at the end of this year, up from 2.6 per cent currently, before returning to around the BOE’s 2 per cent target next year. 

In a more pessimistic scenario, which included crude prices over US$100 a barrel and remaining elevated, with gas 60 per cent higher, the bank predicted inflation could jump to a high of 4.5 per cent in the second quarter of 2027. In the event of a quicker resolution to the conflict in the Middle East, the more optimistic projection showed price growth peaking at 3 per cent, with fewer second-round effects.

In all three scenarios, GDP growth hovers around 1 per cent in 2026 and 2027, before picking up in 2028. 

A sluggish economy, easing domestic price pressures and tightening financial conditions have bought the committee some time in assessing the effects of the war on the UK economy. With vacancies and private-sector wage growth at their lowest since the pandemic, job-market conditions could help contain the possibility that the energy shock triggers second-round effects that exacerbate inflation.

Amid easing domestic pressures, Ramsden and external member Alan Taylor suggested they could consider cuts should the war wrap up quickly.

“If the risks were to subside and the underlying disinflation process continued, I would consider resuming the cutting cycle,” Ramsden said.

Others who backed a hold looked closer to hiking rates. Deputy Governor Clare Lombardelli said that “policy would need to be adjusted were there to be evidence of risks of significant second-round effects.”

The BOE’s outlook has been clouded by a turbulent month for oil and gas prices that are critical to the UK’s inflation outlook. Brent crude has swung from a low of just above US$70 a barrel at the start of July to over US$100 last week before cooling to around US$90 on Wednesday.

The Federal Reserve also opted to leave rates unchanged at 3.5 per cent to 3.75 per cent on Wednesday, although three policymakers dissented in favour of a hike, and Chair Kevin Warsh insisted the central bank would take action if there were signs of inflation remaining higher for longer. Long-dated Treasury bonds nonetheless plunged amid concerns the Fed is acting too slowly to rein in inflation that has run above its target for 5 years.

The BOE also provided the first hints on the future of quantitative tightening ahead of a decision in September on the next year of the program. It said the impact of the balance run-off had been modest, though 5 basis points higher than it estimated last year at 20 to 30 basis points on 10-year gilt yields. BLOOMBERG