Bank of England holds interest rates at 3.75% as Iran conflict weighs on economy

The Bank of England's Monetary Policy Committee (MPC) voted to hold the base interest rate at 3.75%, a decision widely anticipated by markets. The move comes as the committee continues to evaluate the impact of the Iran conflict on the UK economy.

Inflation in the UK stood at 2.8% in May, below forecasts. Higher energy costs resulting from the closure of the Strait of Hormuz – a critical maritime chokepoint – are expected to push inflation higher and slow economic growth, presenting the MPC with a difficult balancing act.

The committee's cautious stance contrasts with the European Central Bank's decision to raise rates in the eurozone last week. Meanwhile, Donald Trump's memorandum of understanding with Iran has raised hopes that oil supplies could soon resume.

The Bank of England had cut rates six times since mid-2024 and was expected to continue doing so before Trump's Operation Epic Fury led Iran to choke off oil supplies from the Gulf. Weaker-than-expected inflation raised hopes that the conflict's impact on overall inflation might be less severe than feared. However, the latest official UK jobs data, published on Thursday, may have sparked some concerns among policymakers.

Wage growth came in stronger than expected at 4.4% including bonuses, and unemployment fell. The MPC closely watches wage trends amid fears that rising prices could feed into higher pay and entrench inflation.

On Wednesday, the US Federal Reserve kept interest rates on hold at a range of 3.5% to 3.75%, where they have been since December.