The Bank of England has left interest rates unchanged at 3.75%, marking the fourth consecutive meeting in which policymakers have opted to keep borrowing costs on hold despite signs that inflationary pressures are easing.
The Monetary Policy Committee’s decision came after official data showed UK inflation slowed to 2.8% in May, below market expectations and moving closer to the Bank’s long-term target.
Recent developments in global energy markets have also provided support for the inflation outlook. Oil prices have fallen sharply over the past week following the US-Iran agreement aimed at ending hostilities in the Middle East and reopening the Strait of Hormuz. Brent crude has declined by around 10%, reducing concerns over energy-driven inflation.
However, the Bank signalled that it remains cautious about declaring victory over inflation.
Governor Andrew Bailey warned that the full impact of recent geopolitical developments remains uncertain and that policymakers are continuing to monitor how lower energy prices filter through to the broader economy.
The Monetary Policy Committee noted that while inflation has moderated, the consequences of recent energy market volatility and wider economic conditions remain difficult to assess with confidence.
Markets had initially viewed weaker inflation data as increasing the likelihood of future rate cuts. However, expectations shifted after stronger-than-anticipated UK employment figures suggested continued resilience in the labour market and ongoing wage pressures.
Investor sentiment was also influenced by the US Federal Reserve’s meeting on Wednesday, where officials adopted a more hawkish tone and indicated that interest rates in the United States could rise before the end of the year.
The combination of stronger labour market data and a firmer global interest rate outlook prompted traders to scale back expectations for UK rate cuts and increase the probability of further tightening later in 2026.
Financial markets reacted negatively to the Bank’s cautious stance. The FTSE 100 fell as much as 1.2%, while the domestically focused FTSE 250 declined around 1%, as investors reassessed the likelihood of lower borrowing costs in the near term.
Market commentators interpreted the decision as a signal that policymakers remain focused on inflation risks despite improving headline figures.
