Britain’s central bank looks set to keep interest rates on hold on Thursday as it waits to see if the economy and inflation continue to weaken, or whether the country will be hit by an energy price shock from the Israel-Iran conflict.
British inflation cooled slightly in May after jumping in April, with price growth in the services sector – key for the BoE – dropping more sharply. Wage growth also slowed and there have been other signs of a weakening in the jobs market.
Overall economic output shrank by the most since 2023 in April due to the impact of U.S. President Donald Trump’s trade tariffs and a one-off hit from the end of a tax break on home sales.
But BoE Governor Andrew Bailey and his Monetary Policy Committee colleagues were already expected to stick to their cautious tone about cutting interest rates even before the outbreak of the Israel-Iran conflict, which has pushed up oil prices by 8.5% in a little less than a week.
Most economists polled by Reuters predicted a 7-2 split on the MPC in favour of holding rates at 4.25%.
Nearly all 60 respondents expected the next quarter-point rate cut will come in August, and a large majority saw a further reduction to 3.75% in the final three months of 2025.
The MPC in May voted 5-4 to cut the Bank Rate by 25 basis points. Two rate-setters voted for a higher half-point cut and another pair to hold rates.
“The combination of differing views amongst Committee members and the uncertainty over the outlook will likely stop the MPC from promising that it will act in August,” Matt Swannell, chief economic adviser to the EY ITEM Club, said.
“It will probably leave the prospect of an August cut on the table by sticking to its slightly more vague commitment to take a gradual and careful approach to cutting interest rates.”
So far, the BoE has cut borrowing costs by the same amount as the U.S. central bank since mid-2024 but by less than the European Central Bank, which lowered rates earlier this month after inflation in the euro zone returned to its 2% target.
Economists polled by Reuters expect UK interest rates to fall faster than in the euro zone over the remainder of this year but by around the same pace as in the United States as the Federal Reserve assesses tariff impacts and inflation risks.
The Federal Reserve left rates unchanged in the 4.25%-4.50% range on Wednesday, as expected. Fed Chair Jerome Powell said tariffs were likely to lead to higher consumer price inflation, but that the Fed was “well positioned” to wait before moving on rates.
OIL PRICES POSE FRESH PROBLEMS
A possible surge in energy prices and a jump in shipping costs due to the Israel-Iran conflict could cause more trouble for the BoE, which remains concerned about persistent inflation pressures in Britain’s economy.
Analysts warned the recent jump in oil prices could also add to the brakes on Britain’s weak economy.
“It’s the worst kind of shock from the standpoint of a central bank. You can’t respond to the negative impact on growth because it’s pushing inflation up. So as a central bank, you’re very disarmed to respond to a shock like that,” said Isabelle Mateos y Lago, chief economist at BNP Paribas.
“It’s very early days to know the persistence of that conflict, and I think it will strengthen the wait-and-see mode of the Bank of England … and the need to move very carefully … that they have been conveying since the start of the year.”
Britain looks set to avoid much of the impact of Trump’s higher trade tariffs after London and Washington reached an agreement on Monday on lowering some tariffs on British exports to the United States.
The BoE said last month that the impact of global trade tensions “should not be overstated” and that tariffs would reduce British economic output by 0.3% in three years’ time and push inflation down by 0.2 percentage points in two years’ time.
(Reporting by Suban Abdulla)
