A Bank of England interest rate hold is widely expected on Thursday, as policymakers weigh the inflationary pressure of the Middle East energy shock against signs that the UK economy is already slowing. The Bank’s Monetary Policy Committee (MPC), the body that sets borrowing costs, is forecast to keep the base rate at 3.75%.
The rate had been falling gradually from a peak of 5.25%, but those cuts stalled after the outbreak of the US-Israel war with Iran at the end of February. The conflict drove up fuel prices in March and is expected to push household energy bills higher from the summer, complicating the MPC’s task considerably.
What the inflation picture looks like right now
According to the Bank of England, twelve-month CPI (Consumer Prices Index) inflation stood at 2.8% in May, unchanged from April but down from 3.3% in March. Food price inflation had fallen to 2.2% over the same period. The Bank’s own page on interest rates puts the current headline inflation rate at 2.6%, still above the 2% target that the MPC is mandated to meet.
That easing trend in food and overall prices gives the MPC some cover to hold rates rather than raise them. But energy costs, driven by the Middle East conflict, are pulling in the opposite direction, and policymakers will know that summer energy bills could reignite broader price pressures.
Adding to the difficulty, new official figures published on Friday showed gross domestic product (GDP) contracted by 0.1% in April, the first decline in eight months. The fall suggests some sectors of the UK economy are already feeling the knock-on effects of the conflict.
What economists are saying about the Bank of England interest rate hold
Suren Thiru, chief economist for ICAEW, said: ‘An interest rate hold on Thursday looks highly certain with rate-setters likely to maintain a watchful approach to tightening policy given the recent deluge of downbeat economic data and growing global uncertainty.’
Thiru added that, while rates could remain at 3.75% for the rest of the year, ‘it will become an increasingly close call as inflation starts to surge over the summer, especially if turbulence in the Middle East persists.’
Sanjay Raja, chief UK economist for Deutsche Bank, said the Bank of England ‘continues to walk a narrow path in balancing weaker labour market outcomes with emerging price pressures’ and cautioned that the ‘MPC’s patience may be running thin’. He is also predicting that interest rates will stay the same for the rest of 2026 but said ‘the odds of a rate rise are increasing’, adding: ‘The duration of the energy shock is becoming non-negligible. And the spillover of price pressures is also becoming uncomfortable.’
The language from both economists points to the same underlying tension: the MPC does not want to raise rates and choke off growth while GDP is already dipping, but it equally cannot ignore an energy-driven inflation spike that could become self-sustaining.
How other central banks are responding
The Bank of England is not the only institution wrestling with this dilemma. The European Central Bank opted to increase its interest rate on Thursday, the first such rise in almost three years, noting that the conflict was ‘generating inflation pressures’. The US Federal Reserve is also due to announce its next rate decision on Wednesday and is widely expected to keep rates on hold.
Those contrasting moves, one central bank raising and another holding, illustrate just how differently policymakers can read the same global shock depending on their domestic conditions.
For households in the UK, the practical upshot is that mortgage rates and savings rates are unlikely to move sharply in either direction before the next scheduled MPC decision. According to the Bank of England, that next decision is due on 17 September 2026, giving policymakers the summer to assess whether energy prices and GDP figures shift the balance toward action.
