The Bank of England has kept interest rates on hold but signalled that the crisis in the Middle East could lead to future increases.
A large majority of policymakers opted to keep interest rates at 3.75% at the Monetary Policy Committee (MPC) meeting on Thursday.
But they highlighted that the conflict in the Middle East means there is a lot of uncertainty about the UK economy over the rest of this year.
Here the Press Association looks at what drove the Bank’s decision and what it means:
– What happened to interest rates on Thursday?
The Bank decided to keep rates unchanged at 3.75%.
Eight of its rate-setting members voted for a hold, with only one – Huw Pill, the Bank’s chief economist – calling for an increase to 4%.
It is the third consecutive meeting where rates have been held at this level, with rates having been steadily reduced from 5.25% since 2024.
– What does it actually mean?
The base rate helps dictate how expensive it is to take out a mortgage or a loan.
Many lenders had been chopping rates early this year in expectation of the Bank of England lowering its base rate but started increasing rates sharply following the outbreak of the Middle East conflict.
However, savings rates are also linked to the interest rate and are also likely to increase.
– What is happening with inflation in the UK and why does this influence rates?
Raising interest rates is the central bank’s main way of reducing inflation – the measure of how fast prices increase over time.
The Bank’s aim is to put policy in place which will help keep inflation at the 2% target rate set for it by the Government.
Consumer Prices Index (CPI) inflation rose to a three-month high of 3.3% last month, driven by higher petrol and diesel costs.
The further inflation moves away from the 2% target rate, the more likely Bank of England policymakers are to act by voting to increase interest rates.
– What do oil prices in the Middle East have to do with inflation in the UK?
The disruption being caused by the war is affecting global oil and gas supplies and pushing up wholesale prices, with the key Strait of Hormuz shipping route blocked and attacks on facilities in Qatar adding to the woes.
This all feeds through to the prices we pay at the petrol pumps and the cost of gas and electricity, which is set to send inflation rising sharply.
The Bank has also cautioned that higher energy costs will have secondary effects, particularly on industries which use high levels of energy.
This includes the food sector, with firms telling the Bank last week that they see inflation in the sector of up to 7%. They have also been affected by pressure on fertiliser costs.
– What is most likely to happen to inflation in the future?
The Bank of England laid out three potential scenarios for the economy in its latest report, having been directed to show more options for the outlook following the Bernanke Review.
All scenarios would see a larger-than–expected increase in inflation.
The most benign scenario, which would see a swift resolution to the conflict and easing oil and gas prices, would still see inflation rise as high as 3.6%.
A more extreme scenario, where oil prices would stay above current levels for a protracted period and gas prices would spike, could see inflation rise as high as 6.2%.
In the worst of these scenarios, inflation would not come back down to the 2% target rate within the forecast period.
– What else could happen in the economy?
All Bank of England forecasts suggested a gloomier outlook for the economy, and therefore for Chancellor Rachel Reeves.
They all indicated that GDP will slow this year, to either 0.7% or 0.8%, and would see a smaller-than-expected recovery in 2027.
The predictions also pointed towards rising unemployment, with two scenarios indicating this will peak at 5.5%, with the most extreme forecast showing a peak of 5.6%.
– Will interest rates have to rise?
The financial markets are expecting at least one interest rate increase in the coming months.
Some members of the MPC made it particularly clear that they think an interest rate increase could happen.
Governor Andrew Bailey was among those to indicate that the Bank could need to act, telling reporters that the MPC should not wait for impacts from second-round inflation before tightening monetary policy.
The Bank’s most extreme scenario has indicated there is potential for interest rates to increase as high as 5% in order to bring inflation down.
