The Bank of England has voted to keep interest rates unchanged at 3.75%, in a closely watched decision that underscored the growing tension between cooling domestic demand and rising global inflation risks linked to the Middle East conflict.
The Monetary Policy Committee voted 8–1 in favour of holding rates, with only one member backing an increase, as policymakers opted for caution in the face of volatile energy markets and an increasingly uncertain global outlook.
Financial markets, however, are continuing to price in the possibility of further tightening before the end of the year, reflecting concerns that the escalation of geopolitical tensions could keep commodity prices elevated for longer than previously expected.
The decision marks a pause rather than a pivot, with the Bank appearing keen to avoid any abrupt policy shifts while inflation risks remain highly sensitive to external shocks.
Susannah Streeter, chief investment strategist, Wealth Club said: “With geopolitical tensions so fraught, the Bank of England wanted to avoid a knee-jerk reaction and is trying to project calm by keeping rates on hold. But there’s clearly unease spreading around the table, as oil prices reach scorching levels and the repercussions risk seeping into the price of everyday goods.
Policymakers are wary of signs that inflation is becoming embedded in the economy through higher consumer prices and sticky wage growth but have opted for no action today with 8 members voting to keep rates on hold and Huw Pill, the one dissenter, opting for a hike.
The members opting to hold rates are more cautious, with deflationary impacts also potentially swirling. The economy is looking set to lose its early sparks of momentum, as shoppers turn cautious and companies pause investment, so demand is likely to be squeezed out of the economy anyway, which could help keep a lid on inflation going forward.
Nevertheless, financial markets are pricing in three rate hikes to come amid fears of a deteriorating situation in the Middle East and expectations that commodity prices will stay highly elevated. This is a sharp change compared to when the ceasefire was announced. We’re back where we were in mid-March, with worries returning that the world will face a prolonged energy crunch.
So even though the Bank has pressed pause, these are still highly uncertain times for the mortgage market. Lenders whipped away cheaper deals as the conflict got underway, but the ceasefire then saw reductions from major high street banks, and better deals have filtered through this week. But with the Middle East crisis still acute, central bankers staying super-wary, and financial markets pricing in multiple rate hikes, it’s highly unlikely lenders will offer better deals any time soon, and there’s a risk rates could drift higher again. Those mortgage holders on tracker rates will be breathing a sigh of relief today, with interest rates on hold for now, but it could be short-lived given expectations that multiple rate increases could be around the corner.
For savers, it’s worth getting ready to secure a better deal. Far too many people squirrel money into instant access savings accounts paying paltry amounts of interest. With inflation set to ramp up, it’ll eat away at the real value of stashed cash. If you are able to lock money away for a year or so, the rates offered can be even higher, but by shopping around, you are likely to find a better deal on a range of everyday accounts too.”
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