Bank of England expected to hold interest rates at 3.75% as inflation risks resurface

The Bank of England is widely expected to keep interest rates on hold at 3.75% when its Monetary Policy Committee (MPC) delivers its latest verdict on Thursday, with policymakers caught between a softening economy and renewed inflation risks from abroad.

A Reuters poll of dozens of economists found that all of them expected the Bank to leave rates unchanged this month. The debate has instead shifted to what comes next, with a clear split over whether the next move will be a cut, a hold or, for a sizeable minority, an unexpected hike.

The decision lands a day after official data showed inflation holding at 2.8% in May, comfortably above the Bank's 2% target. With wholesale energy prices climbing again and a fresh rise in household bills due in July, the case for caution has strengthened.

A committee pulled in two directions

The MPC faces an awkward balancing act. On one side, the domestic economy is showing clear signs of strain, with the labour market weakening and growth stalling. On the other, energy-driven price pressures threaten to keep inflation stuck above target.

While a majority of economists expect rates to remain at 3.75% for the rest of the year, nearly 40% of those polled by Reuters predicted at least one further hike, and only a handful expected a quarter-point cut before December.

That spread of views is unusually wide for a single decision and reflects genuine uncertainty about whether the bigger threat to the economy is sticky inflation or a slowdown that could tip into recession.

Within the committee itself, divisions have become more pronounced in recent meetings. Some members are understood to place greater weight on the cooling labour market and weakening growth, while others remain focused on the risk that above-target inflation becomes entrenched in wages and prices.

The Middle East shadow

The reignition of conflict in the Middle East has complicated the picture considerably. Disruption to the transport and supply of oil and gas has pushed up energy prices, meaning inflation is now running hotter than the Bank had assumed earlier in the year.

Higher crude prices have already fed through to petrol pumps, with the cost of fuel one of the main drivers behind the recent jump in transport inflation. If tensions escalate further, the Bank may find it impossible to justify any easing in the months ahead.

Central bankers generally try to look through temporary energy price shocks, on the basis that they fade from the annual comparison over time. The danger is that a sustained period of higher bills feeds into expectations and pay demands, turning a one-off jump into a more persistent problem.

“The committee will want to look through a temporary energy spike, but it cannot ignore the risk that higher bills bleed into wages and wider prices. Holding is the path of least regret.”

What it means for borrowers

For homeowners, a hold keeps the base rate steady but offers little immediate relief. Many fixed-rate deals taken out in cheaper years are still rolling onto sharply higher rates, and lenders have been adjusting their offers in both directions in recent weeks.

• Current base rate: 3.75%
• Expected decision on 18 June: no change
• Best five-year fixed mortgage rates around 4.4% for buyers with large deposits
• Roughly 40% of economists see at least one further hike this year
• Only a small minority expect a cut before December

Savers, by contrast, continue to benefit from rates well above the levels seen during the cheap-money decade, with the best easy-access and fixed accounts still paying competitive returns.

Brokers advise homeowners approaching the end of a fixed deal to start shopping around several months early, as offers can be secured in advance and pulled at short notice when swap rates move. The recent volatility means deals available one week may vanish the next.

Background

The Bank began cutting rates from a peak of 5.25% as inflation eased through 2024 and 2025, bringing borrowing costs down to the current 3.75%. The pace of cuts has slowed markedly as policymakers grew wary of declaring victory over inflation too soon.

The MPC sets policy with the aim of returning inflation to 2% sustainably, balancing that goal against the risk of choking off growth and employment. Its decisions ripple through the entire economy, influencing everything from mortgage and loan costs to business investment and the value of the pound.

What happens next

Thursday's announcement will be accompanied by the minutes of the meeting, which markets will scour for clues on the committee's thinking. With the July energy price cap rise and the autumn Budget both on the horizon, the Bank's next few meetings are likely to be among the most closely watched of the year.

Investors will pay particular attention to the voting split among the nine members and to any shift in the Bank's language about the balance of risks. A narrower vote or a more dovish tone could revive expectations of a cut later in the year, while a hawkish message would push those hopes further out.