Bank of England poised to hold rates at 3.75% as Middle East crisis stokes inflation fears

The Bank of England is widely expected to keep interest rates unchanged at 3.75% when its Monetary Policy Committee announces its decision on Thursday 18 June, as renewed inflation risks driven by conflict in the Middle East complicate the path back to lower borrowing costs. Economists who had earlier pencilled in cuts for 2026 have steadily revised their expectations towards a prolonged hold.

The central dilemma facing rate-setters is the disruption to oil and gas supplies caused by instability in the region, which has pushed energy prices higher and threatens to reverse the downward drift in inflation seen earlier in the year. Headline consumer price inflation eased to 2.8% in April, down from 3.3% the previous month, but policymakers are wary that energy costs could feed the figure back up.

Against that uncertain backdrop, the committee is split. While a majority is expected to favour holding steady, a vocal minority has signalled it wants to raise rates now to guard against the risk of inflation becoming entrenched, setting up one of the more closely watched votes in recent months.

A divided committee

Markets and analysts anticipate the headline decision will be a hold, but attention has shifted to the size and shape of any dissent. The Governor and other cautious members are expected to argue for patience, pointing to the recent fall in inflation and the risk that higher rates could choke off a fragile recovery. Others take a sterner view of the inflation threat.

The committee's emerging fault lines can be summarised as follows:

• Cautious members favouring a hold, citing April's drop in inflation to 2.8%
• Hawkish members pressing for an immediate rise to pre-empt entrenched inflation
• A conditional camp open to a rise if the energy crisis deepens
• A widely forecast vote split of around seven to two in favour of holding
• Markets watching dissent levels for clues on the next move

The energy shock

The single biggest factor reshaping the outlook is the conflict in the Middle East and its effect on global energy markets. Disruption to the transport and supply of oil and gas has driven prices upward, and because energy costs ripple through the wider economy, from transport to manufacturing, the inflationary impact extends well beyond household fuel bills.

This has had a chilling effect on expectations of rate cuts. At the start of the year, many forecasters anticipated that the Bank would be loosening policy by mid-2026. Instead, the prevailing view is now that rates will hold or even rise, with the economy settling into what some analysts describe as a structural phase of higher borrowing costs and persistent inflation risk.

“We expect the Bank to keep rates on hold, but the main question is how many members dissent and vote for a hike.”

— James Smith, economist at ING

Background: a long fight against inflation

The Bank has spent several years wrestling inflation back from the highs reached in the wake of the pandemic and the energy crisis that followed Russia's invasion of Ukraine. Rates were raised aggressively before a cautious easing began, and the base rate has since settled at 3.75% following a hold in late April. The committee's task throughout has been to bring inflation sustainably back to its 2% target without inflicting unnecessary damage on growth and jobs.

The current episode underlines how exposed the UK remains to external shocks. Just as inflation appeared to be coming under control, a geopolitical crisis far from British shores has reintroduced uncertainty, illustrating the limits of domestic monetary policy in the face of global energy markets.

What it means for households

For borrowers, a hold at 3.75% means no immediate relief but also no fresh pain. Those on fixed-rate mortgages are insulated for now, but the fading prospect of cuts will disappoint anyone hoping for cheaper deals later in the year. Savers, conversely, may welcome the persistence of higher rates, which continue to deliver more competitive returns than they have grown used to over the past decade.

The longer-term picture depends heavily on events the Bank cannot control. Should the energy shock ease, the door to cuts could reopen later in 2026; should it worsen, a rate rise becomes a live possibility. Thursday's decision, and crucially the breakdown of the vote, will offer the clearest signal yet of how the Bank intends to navigate a path that has grown markedly more treacherous in recent weeks.