The Bank of England has held interest rates steady at 3.75% amid ongoing uncertainty around higher energy prices.
In a move that was widely expected by economists, the Monetary Policy Committee voted by a majority of 7-2 to maintain the rate, with two members voting to increase the rate by 0.25% to 4%.
It marks the fourth meeting in a row that the Monetary Policy Committee has kept rates unchanged.
While global energy prices have fallen since the previous meeting in response to events in the Middle East, they remain higher than pre-conflict and have continued to be volatile. The MPC said the impact of the energy shock on the UK economy remains uncertain.
Meanwhile, inflation has cooled to 2.8%, but this is expected to be short-lived, with the ongoing effects of higher energy prices set to see inflation rise later this year. The MPC said the risk of material second-round effects in price and wage-setting is greater the longer higher energy prices persist.
Danni Hewson, head of financial analysis at AJ Bell, said: “The Bank of England has once again proved to be a reliable partner, delivering the much-anticipated interest rate hold as the inflationary outlook continues to fluctuate.
“With the peace deal now signed by both the US and Iran, the price of oil has plummeted to $78 a barrel and the Bank of England now believes inflation will top out at around 3.25% in the final quarter of the year. This is way below the worst-case scenario that had been set out as a potential outcome at the last meeting.
“But there is need for continued caution. The situation in the Middle East remains delicate and the months-long blockade of the Strait of Hormuz won’t just magically disperse, with the damage done to critical energy infrastructure potentially taking years to repair.”
Alexandra Loydon, group advice director at St. James’s Place, commented: “The Bank of England’s decision today to hold interest rates at 3.75% comes as little surprise, particularly after yesterday’s news that inflation remained at 2.8% in May.
“The recent US-Iran truce and subsequent easing in energy prices may have taken some pressure off the Bank to raise rates further, but with inflation still above the Bank’s 2% target and borrowing costs still high, households across the UK are likely to continue to feel the squeeze.
“With our latest Financial Health Report finding that just 37% of people now describe themselves as financially comfortable, and more than twice as many saying their financial situation has worsened than improved over the past twelve months, today’s decision will provide little respite. For those managing mortgages, debt repayments or other financial commitments, higher borrowing costs are just one of the many pressures at a time when household budgets are already stretched.”
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