The Bank of England has voted to hold interest rates at 3.75%, balancing renewed inflation risks against a weak economic backdrop.
The monetary policy committee voted 8-1 to keep rates unchanged, with one member backing an immediate rise. The split underlines growing concern that rates may need to increase again if inflation continues to build.
The main pressure comes from the Iran war, which has pushed oil prices higher and left global energy costs highly uncertain. With the Strait of Hormuz still effectively closed to oil tankers, households and businesses face the prospect of higher energy bills, rising food prices and increased manufacturing costs through much of 2026.
Earlier this year, interest rates appeared to be on a downward path after four cuts the previous year. Markets had expected further reductions as inflation moved closer to the 2% target. That outlook has now shifted.
Inflation had already risen to 3.3% in March, while businesses are reporting weaker exports, higher costs and pressure to raise prices. Xero’s latest Small Business Index also points to slowing SME sales growth.
The Bank noted that households are already expecting an inflation hit and may be cutting back spending. However, rising unemployment, which reached 5% at the start of the year, could limit wage pressure and reduce the risk of inflation becoming entrenched.
Mortgage lenders have trimmed some rates as swap rates eased, but cheaper deals are unlikely to return in the near future. Markets are still pricing in possible rate rises, which will continue to influence high street lending.
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