Bank of England holds rates at 3.75% as Iran truce offers cautious relief

The Monetary Policy Committee delivered a 7-2 vote to keep borrowing costs steady, aligning with market forecasts. Despite the consensus, Chief Economist Huw Pill and external member Megan Greene dissented, advocating for a quarter-point hike to stabilize household inflation expectations, which have hit their highest levels since 2009 in recent surveys. Governor Bailey defended the "active hold" as a necessary buffer, noting that while the potential reopening of the Strait of Hormuz is a positive development, the energy price shocks of the past four months have already embedded significant inflationary pressure into the British economy.

Economic projections suggest inflation will climb above 3.25% by the final quarter of the year, a forecast that remains lower than previous estimates. Simultaneously, the Bank signaled a slight uptick in growth, with the economy expanding at an underlying rate of 0.2% per quarter. Policymakers remain divided on the risks: while some worry about the cooling labor market and sluggish wage growth, others, including Catherine Mann, argue that the threat of runaway inflation necessitates a more aggressive stance. For now, the Bank is opting to wait, prioritizing data over immediate escalation as it navigates a volatile political climate and the potential fallout from Prime Minister Keir Starmer’s declining popularity.