Many economists do not think an interest rate hike is on the cards this month.
The Bank of England is set to keep interest rates on hold as policymakers face the task of navigating the Middle East energy shock and a slowing economy.
Many economists do not think an interest rate hike is on the cards this month despite concerns that the Iran war is putting pressure on UK inflation. The Bank’s Monetary Policy Committee , which uses interest rates as a tool to control inflation, is widely expected to keep the level at 3.75% at the next announcement on Thursday.
Rates had been gradually coming down from a peak of 5.25% but the outbreak of the US-Israel war with Iran at the end of February put the brakes on any further cuts. This is largely because of the impact to energy costs, which drove up the price of fuel in March and will lead to higher household energy bills from the summer.
But at the same time, the MPC will be wary of raising rates if it holds back growth in the UK economy. New official figures published on Friday showed gross domestic product declined by 0.1% in April, the first contraction in eight months, in a sign that some sectors were feeling the impact of the Middle East conflict.
Suren Thiru, chief economist for ICAEW, said: “An interest rate hold on Thursday looks highly certain with rate-setters likely to maintain a watchful approach to tightening policy given the recent deluge of downbeat economic data and growing global uncertainty.
“Though interest rates could stay at 3.75% for the rest of the year, it will become an increasingly close call as inflation starts to surge over the summer, especially if turbulence in the Middle East persists. ” The European Central Bank opted to increase its interest rate on Thursday for the first time in almost three years, noting that the conflict was “generating inflation pressures”.
The US Federal Reserve will also announce its next interest rate decision next Wednesday and is widely expected to keep rates on hold. Sanjay Raja, chief UK economist for Deutsche Bank, said the Bank of England “continues to walk a narrow path in balancing weaker labour market outcomes with emerging price pressures” and cautioned that the “MPC’s patience may be running thin”.
He is also predicting that interest rates will stay the same for the rest of 2026 but said “the odds of a rate rise are increasing”, adding: “The duration of the energy shock is becoming non-negligible. And the spillover of price pressures is also becoming uncomfortable. ”
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