The Bank of England has held interest rates steady at 3.75% as it monitors the impact of the Middle East war on inflation.
Three members of the Monetary Policy Committee’s nine members voted in favour of raising rates to 4%, but six voted to hold rates.
It is the fifth time the central bank has decided to keep the rate unchanged. However, Bank of England governor Andrew Bailey warned that high energy prices will cause inflation to rise again later this year, with markets continuing to price in rate hikes before the end of 2026.
Bailey said: “Today, we’ve held Bank Rate at 3.75%. Inflation has fallen faster than we’d expected, but the conflict in the Middle East continues to mean high and volatile energy prices. That will cause inflation to rise again later this year. However the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”
Ed Monk, pensions and investment specialist at Fidelity International, said: “Rates are on hold for now, but this may well be the calm before the storm. Households should brace for borrowing costs to rise in the months ahead.
“Financial markets prior to today’s decision were expecting a quarter-point rise some time before the end of the year, with further rises likely early next year and then again within 12 months from now. Were those rises to come to pass, they would take the Bank Rate to 4.5% and represent a significant squeeze on households.
“That can still be avoided, however, if the Bank can be assured that the energy price rises we have seen since the conflict in the Middle East will not widen out into higher wages and an inflationary spiral. Beyond the Iran conflict, conditions are generally supportive of lower rates, with inflation – while still above target – tracking slightly below expectations.
“For investors, volatile expectations for rates are likely to be mirrored by volatile asset prices in their portfolios. Higher inflation and rates pose a threat to the value of some of the world’s largest companies because they erode the value of their future earnings. Ensuring you are properly diversified now, while markets remain near record levels, would be wise.”
Laura Suter, director of personal finance at AJ Bell, said: “The Bank of England has decided that the safest path through the mayhem is a straight line. It held steady, despite the spike in the oil price during June’s peace deal wobbles. However, no news isn’t necessarily good news – especially for borrowers.”
Suter said the fact more interest rate rises are expected in the coming months is not good news for those planning to remortgage or buy a property.
She explained: “It’s particularly difficult for buyers with small deposits, with the average rate for a five-year deal for those with a 5% deposit having hit over 6%. These are often first-time buyers who are keen to get on the property ladder and out of the rental market. They face the dilemma of taking a bit longer to save up a larger deposit pot, meaning they can access cheaper mortgage rates, versus risking mortgage rates rising during that period.
“As some of the geopolitical tension subsides a little, pushing oil prices off recent highs, inflation fears may drop back a little, bringing down interest rate expectations and mortgage deals. However, the level of uncertainty around global developments means this is far from guaranteed.”
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