The Bank of England kept its benchmark interest rate unchanged at 3.75% on Thursday, choosing not to raise borrowing costs despite persistent inflation following the US-Iran conflict that drove up energy prices.
The decision, which was widely anticipated, came a day after the US Federal Reserve signaled it may hike rates later this year while holding steady for now.
On Tuesday, the Bank of Japan lifted its interest rates to their highest level in 31 years as it grapples with inflation linked to the Middle East war. Meanwhile, the European Central Bank last week raised its key rate for the first time since 2023.
Oil prices have declined in recent days, which is encouraging, said Bank of England Governor Andrew Bailey after the announcement. But they remain above pre-war levels. Whatever happens going forward, the elevated energy prices of the past four months have already added inflationary pressure.
Britain’s annual inflation rate held steady at 2.8% in May, according to official data released Wednesday, still well above the BoE’s 2% target. “Our responsibility is to ensure that higher inflation does not persist and cause lasting damage to the economy,” the central bank said in a statement.
Two members of the monetary policy committee supported an immediate 0.25-point hike to 4.0%, but Bailey joined the majority in voting to keep rates unchanged, meeting minutes showed. The BoE also pledged to closely monitor broader UK and global economic trends, including British unemployment.
The UK jobless rate eased to 4.9% in the three months to April, down from 5.0% in the first quarter, according to the Office for National Statistics. Youth unemployment, however, remained above 16%. A recent government-commissioned review warned that the number of 16- to 24-year-olds not in work, education or training surpassed one million in the first quarter, risking a “lost generation.”
Britain’s economy shrank slightly in April as the Middle East war dampened growth. While that conflict may be nearing its end, political turmoil within the Labour Party is casting uncertainty over the country’s outlook.
On Thursday, a crucial local election could determine the fate of Labour leader and Prime Minister Keir Starmer, who has faced mounting pressure after a string of policy reversals and a controversy over appointing Peter Mandelson an associate of convicted sex offender Jeffrey Epstein—as ambassador to Washington.
Greater Manchester mayor Andy Burnham is seeking to win a by-election in Makerfield, potentially positioning himself to challenge Starmer for the premiership.
