A person takes shelter from the rain while walking near the Bank of England building on the day the Monetary Policy Committee lowered interest rates on December 18, 2025 in London, United Kingdom.
Toby Melville | Reuters
The Bank of England kept UK interest rates unchanged at 3.75% on Thursday, as policymakers continue to balance the need to tackle above-target inflation and lackluster economic output.
The move is in line with forecasts from economists polled by Reuters, and was supported by seven of the BoE’s nine monetary policy committee members at the Bank of England’s May meeting.
The two people who voiced their opposition were Hugh Pill, the BoE’s chief economist, and Megan Green, an external member of the Monetary Policy Committee. Mr. Pill and Mr. Greene both voted to raise the BOE’s “base rate” by 25 basis points to 4%.
The decision comes as rising energy costs following the Iran war have led to rising inflation in economies around the world, with the UK, a net energy importer, particularly vulnerable to price shocks.
The BoE said in a summary of its decision on Thursday that although prices had fallen since the initial spike, the war “makes it difficult to predict what will happen to prices”.
Inflation in the UK itself was lower than expected at 2.8% in May due to higher prices due to higher transport fuel costs, but data released last week showed the economy contracted by 0.1% in April.
Inflation fell to 2.8% in April, but the decline was expected to be short-lived due to changes to Britain’s regulated energy price cap. The price cap is set to rise by 13% later this summer, when energy costs hit a two-year high.
Despite the easing, the central bank now expects inflation to rise again as energy prices have a knock-on effect across the economy.
“The impact on the economy and inflation will depend on how long the energy price hikes last.” “Monetary policy cannot influence global energy prices. Our job is to ensure that high inflation does not persist and have long-term effects on the economy. We are monitoring the situation very closely,” he added.
LSEG figures show that despite Washington and the Iranian government reaching a breakthrough in peace talks, the market still expects the Bank of England to raise interest rates by the end of the year.
The Bank of England Monetary Policy Committee voted to keep the key interest rate unchanged at 3.75% at its April meeting.
Ahead of the meeting, traders are pricing in a 96% chance that the central bank will leave its key policy rate unchanged, according to LSEG data.
The conflict has effectively shut down the Strait of Hormuz, a key oil shipping route through the Middle East, and oil prices continue to rise.
US President Donald Trump and Iranian President Masoud Pezeshkian on Wednesday electronically signed a 14-point memorandum of understanding aimed at laying the foundations for a durable peace settlement to the four-month war.
Central banks fight inflation
This comes after the Federal Reserve also opted to keep US interest rates on hold, keeping the federal funds rate at 3.5% to 3.75% as expected. But investors were spooked by Kevin Warsh’s first meeting as Fed chairman, and major averages plunged in response to some hawkish signals.
Last week, the European Central Bank became the first major central bank to raise its key interest rate in response to the energy crisis caused by the Iran war. The Bank of Japan followed suit on Tuesday, raising its policy interest rate to 1%, the highest level in 31 years.
“We think the BoE can avoid the kind of monetary tightening that the European Central Bank has already started to do and that the Fed signaled last night,” said Luke Bartholomew, deputy chief economist at Aberdeen.
“Indeed, if energy prices continue to ease, discussions could turn back to rate cuts, but that may have to wait until next year.”
George Brown, senior economist at Schroders, said the BoE could not afford to be complacent in the face of lingering inflation risks.
“Right now banks are buying time rather than continuing to attack,” Brown said.
“We think the bar for rate hikes remains high. A softer labor market and slower growth should help limit second-order effects, and progress towards reopening the Strait of Hormuz should also reduce some of the more extreme upside risks to energy prices.”
Suren Tiloo, chief economist at the Institute of Chartered Accountants in England and Wales, said UK monetary policy was currently “at a crossroads”.
He added that hopes are rising that the U.S.-Iran peace framework will curb inflation without the need for further tightening, but warned that new hostilities could tip the balance towards rate hikes again.
