Bank of England holds interest rates at 3.75%

The Bank of England has left interest rates unchanged at 3.75% for the fifth consecutive meeting, as policymakers balanced falling inflation against the risk of renewed price pressures driven by higher energy costs linked to the conflict in the Middle East.

The Monetary Policy Committee (MPC) voted 6-3 to maintain Bank Rate at 3.75%, with three members favouring a 25 basis point increase to 4% amid concerns that elevated energy prices could lead to more persistent inflation.

The decision follows the latest official figures showing UK inflation fell to 2.6% in the year to June, lower than the Bank had expected. However, policymakers warned inflation is likely to rise again later this year as higher energy prices feed through into household bills and business costs.

In its latest Monetary Policy Summary, the Bank said conflict in the Middle East continues to disrupt energy transportation and supply, creating volatility in oil and gas markets. While monetary policy cannot influence global energy prices, the MPC said its role is to ensure any resulting increase in inflation does not become embedded in wage and price-setting behaviour.

The Bank noted that tighter borrowing costs for households and businesses, combined with a softer labour market, should help contain inflationary pressures over time. Nevertheless, it judged that risks to the inflation outlook remain skewed to the upside and said it stands ready to act if necessary to return inflation sustainably to its 2% target.

“That will cause inflation to rise again later this year. However the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”

The decision is likely to provide some certainty for businesses and borrowers, although lenders cautioned that elevated operating costs continue to weigh on investment decisions.

Mike Randall, CEO of Simply Asset Finance, said: “Holding interest rates offers a degree of stability, but it won’t make SMEs feel particularly optimistic while overall operational costs remain high.

“This highlights a need for flexible financing that can help fuel the SME funding ecosystem. Offering realistic lending models will be vital to ensure businesses can access capital on terms that reflect current economic pressures, rather than hitting a funding wall.

“From a policy perspective, a rate hold places the ball squarely in the government’s court. The new Business Secretary, Jonathan Reynolds, has been tasked with backing business investment, and there is no time to lose. Continuing initiatives such as the Growth Guarantee Scheme is a start, but businesses now want to see the government deliver on its promised reforms and make it easier for them to operate and invest.”

Neil Rudge, Chief Banking Officer at Shawbrook, added: “Against a backdrop of continued global uncertainty, the MPC has held interest rates in July. While recent movements in energy prices have eased from earlier peaks, they continue to contribute to an uncertain outlook for further rate adjustments later this year.

“SMEs remain understandably cautious as geopolitical events continue to unfold, with supply chain disruption and rising operating costs still creating challenges for many businesses. While the new Government may help improve confidence over time, business owners can benefit today from discussing their financing options with a broker, adviser or direct with their lender – whether that’s securing funding to support growth or ensuring they have the right level of resilience for the months ahead.”

While the Bank’s latest decision maintains stability for borrowers in the short term, the split vote highlights growing concern among policymakers that inflationary pressures could re-emerge if energy prices remain elevated.