Bank of England holds interest rates at 3.75%

The Bank of England’s Monetary Policy Committee (MPC) has voted to hold Bank Rate at 3.75%, maintaining its cautious stance as policymakers continue to assess the inflationary impact of higher energy prices and ongoing uncertainty in the Middle East. The decision was approved by a 7-2 majority, with two members voting for a rate increase to 4%.

The MPC said inflation has fallen to 2.8%, moving closer to its 2% target, but warned that recent increases in energy prices linked to conflict in the Middle East could push inflation higher again later this year. While energy prices have eased from their initial spike, policymakers said uncertainty remains high and the outlook for inflation will depend on how long elevated energy costs persist.

In its latest policy statement, the Bank highlighted the risk that higher fuel and utility bills could feed through into broader inflation if businesses raise prices to offset rising costs or if workers seek higher wages to compensate for increased household expenses. However, policymakers noted that weaker demand for labour and the current level of interest rates could help limit these second-round inflation effects.

The Bank reiterated that monetary policy cannot influence global energy prices directly, but stressed that its role is to ensure temporary price shocks do not become embedded in the wider economy. It said it would continue to monitor developments closely and stands ready to act if necessary to ensure inflation returns sustainably to target over the medium term.

The decision follows signs of improving inflation data and a tentative easing of geopolitical tensions after a peace framework agreement between the US and Iran helped calm energy markets. Nevertheless, the MPC concluded that uncertainty remains too high to justify a change in policy at this stage.

“Most business owners are focused on building for the future – not trying to second-guess inflation forecasts or the next move from the Bank of England. But holding rates will give some encouragement to those businesses looking to invest in their future.

“The key factor determining growth is simple – access to flexible funding. Opportunities don’t stop appearing just because the economic outlook is uncertain, and businesses shouldn’t have to put progress on hold while they wait for conditions to become perfect.”

“Despite inflation holding steady at 2.8% and some stabilisation in the global economic picture shifting market sentiment in recent weeks, a hold was anticipated and will be a welcome outcome for most firms. Attention will now turn to what comes next, with businesses keen to understand whether rates will begin to fall, remain on hold for longer, or face renewed upward pressure.

“The priority now is planning with purpose. The second half of the year brings both challenges and opportunities, and having the right funding in place to act decisively will be as important as ever. Today’s decision provides a degree of stability to plan around, and firms that use that time well will be better placed for what comes next.”

The latest decision marks the fourth consecutive meeting at which rates have been held at 3.75%, reflecting the Bank’s balancing act between supporting economic growth and preventing a renewed surge in inflation. While inflation has continued to moderate, policymakers remain concerned that energy-driven price pressures could derail progress towards the 2% target if they become entrenched in wage and price-setting behaviour.