The Bank of England is anticipated to maintain the base interest rate at 3.75% amid recent Middle East conflicts and their potential impact on inflation and economic growth.
The Bank of England is widely expected to keep interest rates unchanged at 3.75% during its upcoming meeting on Thursday, July 30, despite escalating tensions in the Middle East. This decision comes as economists and financial experts closely monitor the region’s impact on global oil prices and inflation rates.
The Monetary Policy Committee (MPC) will also release fresh economic forecasts, providing further insight into the UK’s economic outlook.
Recent data from the Office for National Statistics (ONS) shows that UK consumer price index inflation eased to a 15-month low of 2.6% in June, driven by a slowdown in food and fuel prices.
This decline has provided some relief to the MPC, which uses interest rates as a tool to control inflation. However, inflation is expected to rise back to 3.25% later this year due to higher energy costs feeding into household bills.
Middle East tensions and their impact on oil prices
The recent end of the ceasefire between US-Israeli and Iranian forces has increased uncertainty over the economic outlook, particularly concerning inflation. Oil prices have surged above 100 US dollars per barrel for the first time since May, driven by attacks on shipping in the Red Sea and threats from US President Donald Trump. These developments have raised concerns about potential supply disruptions in the region.
Governor Andrew Bailey is likely to address how renewed hostilities have influenced the Bank’s outlook for inflation and how the committee is approaching its decisions on rates. Thomas Pugh, chief economist at RSM UK, believes that oil prices will largely steer the path of interest rates for the next year. “If they remain close to 100 dollars per barrel over the summer, a September rate hike would move firmly onto the table, with another in the winter likely,” he said.
Economic growth and the labour market
The intensifying conflict in the Middle East is also likely to impact the Bank’s growth outlook. After a modest rebound in May, GDP growth remains stagnant, rising by only 0.1% for the month. Rate-setters may be cautious about hiking interest rates amid a backdrop of stagnant growth in the UK economy. A weakening labour market and deteriorating economic outlook could keep the Bank on hold this year, with potential rate cuts in 2027.
Despite the recent decline in inflation, economists had largely predicted that interest rates would be kept stable at 3.75% for the rest of the year. However, the renewed tensions in the Middle East have introduced new variables into the equation. The MPC will need to carefully balance the risks of higher inflation against the potential negative impacts on economic growth and the labour market.
Impact on borrowers and savers
A hold on interest rates would mean unchanged monthly repayments for homeowners on tracker mortgage rates. The average rate on a new two-year fixed deal is currently 5.62%, the highest for more than a month. Rates are going up due to lenders’ funding costs rising owing to renewed volatility in the Middle East. Individual companies do not want to be inundated with applications, so the sector tends to move as a pack.
For savers, a higher Bank rate or the likelihood of an increase can improve the interest rates offered. Some of the deals available to people willing to lock-in their savings for a fixed period are at their highest for nearly two years. The guaranteed interest paid on the top one-year bond is 4.91%, the highest for new customers since. “This rare dose of good news for savers is somewhat of a silver lining after years of poor real returns,” says Rachel Springall of Moneyfacts.
However, market expectations will need to ease back before lenders can hope for a return to cutting rates. The MPC’s cautious approach reflects the delicate balance between controlling inflation and supporting economic growth.
