The Bank of England (BoE) is widely expected to hold its benchmark interest rate at 3.75% for a fourth consecutive meeting, according to analysts cited by the BBC. The Monetary Policy Committee (MPC) is set to announce its decision at 12:00 BST on Thursday, with markets pricing in a hold given lower-than-expected inflation data for May.
Interest Rate Decision and Inflation Outlook
The UK inflation rate remains above target, but the BBC reported that it "has not risen as high as many had feared given the upheaval caused to economies across the world by the US-Israel war with Iran." Over the year to May, transport costs rose by the fastest rate, the Office for National Statistics (ONS) said, while price increases in meat, dairy, and vegetables eased. That inflation figure, which was lower than expected, has reinforced expectations that policymakers will not increase rates at this meeting.
However, analysts caution that price rises are expected to accelerate in the UK due to the delayed impact of higher wholesale energy prices on domestic gas and electricity prices. Victoria Scholar, head of investment for Interactive Investor, said: "UK inflation is expected to increase over the summer after the next Ofgem price cap in July, when we will likely arrive at peak inflation, so for now [inflation] data looks like the calm before the storm."
At its last meeting in April, the MPC signalled that interest rates could rise this year as it attempted to curb inflation following a "significant energy price shock" from the Iran war, according to the BBC. The situation remains highly uncertain, with some analysts predicting no further rises in the benchmark rate for the rest of the year.
Geopolitical Developments and Energy Prices
US President Donald Trump said a peace deal with Iran was signed on Wednesday, and should lead to the reopening of the Strait of Hormuz. The BBC reported that oil prices have dropped close to their lowest since the conflict began, as traders forecast the return of free-flowing ships through the vital waterway, which normally carries a fifth of the world's oil and gas supplies. Analysts believe the deal could slow energy and fuel price rises, making the worst-case scenarios for inflation unlikely.
Last week, the European Central Bank opted to increase its interest rate for the first time in almost three years, noting that the conflict was "generating inflation pressures," according to the BBC.
Mortgage Market Impact
The BoE's base rate influences what banks charge their customers for mortgages and savings. As of 17 June, the average rate on a new two-year fixed mortgage deal was 5.60%, up from 4.83% at the start of March when the Iran war began, according to the financial information service Moneyfacts. For a five-year deal, the average rate was 5.57%, up from 4.95% over the same period.
| Mortgage Type | Average Rate on 17 June | Average Rate at Start of March | Change |
|---|---|---|---|
| Two-year fixed | 5.60% | 4.83% | +0.77 pp |
| Five-year fixed | 5.57% | 4.95% | +0.62 pp |
Source: Moneyfacts, as reported by the BBC.
Implications for Corporate Borrowing and Trade Finance
The BoE's base rate, currently at 3.75%, is the rate it charges other banks and building societies to borrow money, which influences the cost of corporate loans and trade finance facilities. For CFOs and treasury directors, the expected hold signals near-term stability in the cost of capital, though the anticipated rise in inflation this summer may increase pressure for future rate hikes. The lower-than-expected inflation print and falling oil prices provide some relief, but the delayed impact of higher wholesale energy prices on household bills could feed into business costs. The divergence from the ECB's recent rate increase highlights differing inflationary pressures across the eurozone and the UK, which may affect cross-border trade finance costs.
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