The Bank of England (BoE) has held interest rates at 3.75 per cent once more, despite an expectation of climbing inflation in the coming months.
Rates have been maintained at this level since December of last year but there is now widespread speculation that they will rise again later this year, largely driven by the impacts of the Iran war.
The BoE’s Monetary Policy Committee (MPC) voted 6-3 in favour of a hold this time, highlighting both the number of dissenters and the overall acceptance that rates will head upwards.
Rising fuel costs, as a direct consequence of the conflict in the Middle East, impacts the price of production, manufacturing, energy and transport. Raising interest rates is the Bank’s primary tool to try to counter that and prevent inflation spiralling out of control.
However, the reluctance to raise rates too early can be explained by the UK’s extremely slow economic growth, unemployment hovering around 5 per cent and a property market which has stuttered over the past year. Millions of homeowners have moved off mortgage deals signed when interest rates were far lower, meaning repayments are considerably higher now.
The MPC meeting highlighted that a loose labour market will go some distance toward taming inflation over time, while also noting there was “little evidence so far to suggest” that second-round effects of inflation – higher prices and wages, effectively – were taking place.
However, a telling note also cautioned that “risks to the inflation outlook are tilted to the upside” compared to its July meeting and that “there remains scope for the outlook to change materially as events in the Middle East unfold”. The committee was also unanimous in its view that the risk of oil increasing in price for a longer period was more likely than the hoped-for scenario of a fall.
The three MPC members who voted to raise rates now all highlighted the fact that inflation has been above the 2 per cent government target for more than five years and added that a pre-emptive move to hike them could be less damaging in the long run. It cited research which showed “setting policy as if there were stronger second-round effects and course-correcting if needed, would prove to be less costly than vice versa”.
Despite that, analysts are still split over whether the BoE will eventually act.
Frances Haque, chief economist at Santander UK, hinted at the prospect of the base rate remaining at 3.75 per cent throughout 2026, pending geopolitical matters.
“Although both global and domestic challenges remain, there certainly seems to be signs of cautious optimism trickling into the mortgage market. More borrowers are choosing to play the waiting game, with growing interest in tracker mortgages as customers hope to benefit from any future reductions in borrowing costs,” she noted.
“Generally, this ‘wait and see’ approach is here to stay, with our latest forecasts assuming no further cuts to the Bank Rate in 2026. However, as inflation is expected to fall back as we enter into next year, we should see two further cuts across 2027.”
Rob Morgan, chief investment analyst at Charles Stanley Direct, agreed the direction of travel could continue to be sideways for some time – if energy markets can stabilise.
“Unfortunately for households and businesses feeling the heat, the Bank faces an awkward balancing act, highlighted by the split in the MPC voting. Rate cuts are impossible to justify so long as inflation risks loom large on the horizon, while quelling it with a rate rise would increase borrowing costs and make things even harder for large parts of the economy,” he said.
“Provided energy markets remain contained, the most likely outcome is a prolonged pause at the current 3.75 per cent. Policymakers are seeing some encouraging signs that inflationary pressures will moderate once the coming flare-up passes.
“But until they are more confident that higher energy costs will not ignite wider price escalation or feed into wage demands, interest rate cuts are on ice, and the possibility of a raise is not off the table.”
Sam North, eToro’s market analyst, agreed there was less ground to cover now for a hike to be considered. “Governor Andrew Bailey’s message is that domestic inflation looks manageable for now, but the global backdrop is becoming more dangerous,” he said. “The uncomfortable part is that the majority wants to wait for evidence of second-round effects, while three members believe that waiting for them to appear could mean acting too late. The threshold for a hike has clearly fallen.”
For savers, Finder’s personal finance expert Kate Steere urged people to make the most of the gap between interest rates and inflation.
“Savers shouldn’t miss the bigger picture: real returns are back. With inflation at 2.6 per cent, market-leading cash ISAs from providers like Trading 212 (4.51 per cent) and Plum (4.4 per cent) are offering returns nearly 2 per cent above inflation,” she said. “That means cash value isn't just being protected from inflation – it's actively growing. With rates already dropping slightly, now is the time to take advantage before these strong offers slip away.”
Propertymark CEO Nathan Emerson added: “A stable base rate provides greater certainty for the housing market. It gives lenders more confidence to continue offering competitive mortgage products while allowing buyers to make informed financial decisions. Savers also continue to benefit from relatively attractive returns on savings, helping some prospective homeowners build towards a deposit.”
Looking ahead to the rest of the year, Kathleen Brooks, research director at XTB, notes that markets, which can diverge notably from economists or analysts, maintained expectations of a move to 4 per cent by winter, and possibly as soon as the next meeting – though the date of John Healey’s first Budget as chancellor could impact that.
“The interest rate futures market is pricing in two rate cuts in the next year, and there is currently a 52 per cent chance of a rate hike in September, and a 56 per cent chance of a hike in November,” she said. “We think that November is more likely, if the BoE is still considering a rate hike at that stage, since by that time the committee will have a better idea about 2027 pay awards, and the Budget should have been announced, which will give the MPC a clearer idea of the new PM’s economic policy.”
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