The Bank of England voted to keep interest rates on hold at 3.75 per cent following the peace deal in Iran and lower-than-expected inflation data for the UK.
Four cuts in 2025 had the base rate heading toward an expected level close to 3 per cent this year, but the Iran war and subsequent oil price rises derailed that ambition, with the Monetary Policy Committee now voting to hold four times in a row.
A vote of 7-2 highlighted that some members still feel raising rates now to combat inflation coming down the line is the less risky course of action to take, but volatile oil prices and a lack of certainty over what comes next in the Middle East make it difficult to forecast exactly what the overall impact will be.
The Bank of England (BoE) noted that despite inflation falling, they expect it to rise later this year with knock-on effects from energy price rises, but that low demand for workers could limit the impact if businesses are able to keep wage growth requests in check.
There had been fears that the rate may need to rise once more to temper the effects of inflation. But that has been quelled for now on the back of the peace deal framework between the US and Iran, as well as domestic data showing the economy remains more resilient than anticipated.
That has led to some suggestions that mortgage rates could come down quickly in the near future, even with the BoE’s interest rate remaining unchanged for now.
Barclays are making cuts to a range of two- and five-year residential fixes from Friday, while Santander is among those to have already lowered some deals.
The BoE has a government-set mandate to try to control inflation at a 2 per cent level, with interest rates one of the primary tools it uses to do that. On Thursday, the MPC said they remain “ready to act as necessary to ensure that CPI inflation remains on track to meet the 2 per cent target in the medium term”.
Reacting to the hold vote this time around, David Bharier, of the British Chambers of Commerce, said it was “the common-sense call, given yesterday’s better-than-expected inflation data and falling oil prices after the USA and Iran signed a peace deal.”
Luke Bartholomew, deputy chief economist at Aberdeen, added that wider economic figures hinted at the BoE’s own plan to stick at 3.75 per cent for the remainder of 2026.
“The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures. But with the recent fall in energy prices and the softer inflation data yesterday, events are evolving in line with, or potentially even better than, the Bank’s scenario A from the last meeting, which was consistent with keeping rates on hold this year,” he said.
George Brown, senior economist at Schroders, said the BoE was “playing for time” and that “the bar for hikes remains high”, but urged the MPC members against complacency if inflation started pushing higher.
And Victor Trokoudes, CEO at money app Plum, noted that one reason for not making changes at this stage was that the BoE “went into the energy crisis with the base rate [already] some way above policymakers’ estimates of the neutral level, that neither boosts nor reduces inflationary pressure.” Mr Trokoudes also agreed with the assessment that the MPC will look to hold rates at the current level for as long as possible this year.
If so, it’s a boost to savers, who were urged to revisit their bank accounts by Aileen Robertson, head of savings at Atom Bank, to ensure their cash was earning a strong rate of interest well above inflation.
“For savers, this pause should be viewed as a call to action. We have experienced a prolonged period of shifting rate expectations, but right now, competitive returns are still very much on the table,” she said.
“The mistake savers make in a holding pattern is doing nothing. If you leave your cash sitting in a low-yielding high-street account, you are likely to be actively losing money to inflation. With rates steady for now, it’s an ideal time to review your options, consider locking into a strong fixed-rate saver, or utilise your cash ISA allowance with a provider that passes value back to the customer.”
Several savings accounts are offering around or in excess of 4.5 per cent right now, as are fixed-rate bonds, while regular saver accounts can see consumers earn around 7 per cent on their cash in the best spots.
Meanwhile, Scott Clay, director at property lender Together, said the rate call “may signal a turning point for the property market” and pointed to recently falling swap rates, which impact mortgage prices.
In late April, the bank warned that inflation could surge significantly higher this year in a worst-case scenario, but some economists are already forecasting that the UK may have avoided that outcome.
Even so, the strong likelihood is that food prices will rise throughout the year, and the energy price cap is heading up for the three months from July.
That doesn’t necessarily mean the MPC will vote to hike interest rates in future; their next meeting is on 30 July, as a wider range of factors are also at play in the decision, including economic growth, employment, wage growth and services inflation.
One expert is already predicting the next move will actually be a cut, but governor Andrew Bailey has said the Bank will watch economic indicators before deciding on a renewed approach, with no pre-set path determined for interest rates.
The minutes of the June vote reiterated that, saying: “The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy.”
