Bank of England holds main interest rate at 3.75% as Iran war inflation pressures ease

LONDON — The Bank of England has held its main interest rate at 3.7% as the inflation pressures on the British economy have become more benign after the U.S. and Iran signed a deal to sign deal to end their war.

Thursday’s decision was widely anticipated after figures showed inflation did not rise as had been expected in May, holding steady instead at 2.8%.

Though that remains above the bank’s target of 2%, it raised hopes that the upward pressure on prices emanating from the spike in oil and gas prices after the start of the Iran war on Feb. 28 may have been less than anticipated.

Economists think rate-setters will opt against hiking rates over coming months, but only if the recent fall in energy prices is sustained. The pressure on central banks since the outbreak of hostilities in the Persian Gulf has been to raise rates. The European Central Bank hiked last week while on Wednesday, half of the policymakers at the U.S. Federal Reserve said that they could support a rate hike later this year.

Andrew Bailey, the Bank of England governor, said the recent decline in oil prices has been “encouraging” while noting they are still higher than before the war, a steer to markets that higher U.K. borrowing costs are possible.

“Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline,” he said. “The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”

Two of the nine members of the Monetary Policy Committee remain concerned enough about those pipeline pressures that they voted for a quarter-point increase.

Because of the recent pullback in oil and gas prices, the bank has trimmed its forecast for inflation in the final quarter of the year to 3.25%. The hope is that inflation then starts to drop next year, freeing up the bank to cut rates, allowing mortgage lenders to offer cheaper home loans.

“If energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year,” said Luke Bartholomew, deputy chief economist at asset management firm Aberdeen.