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Bank of England expected to hold interest rates UK interest rates held at 4.25% by Bank of England
(about 13 hours later)
The Bank of England is expected to keep interest rates on hold when its policymakers announce their next decision later. The Bank of England has hinted at further interest rate cuts, which could come as soon as August.
The Bank cut the rate to 4.25% in early May, when its Monetary Policy Committee (MPC) also hinted at more reductions to come. It decided to keep rates at 4.25% on Thursday with inflation, the rate prices rise at over time, remaining at its highest level for more than a year and above the Bank's target rate.
But analysts think those cuts will not arrive until later in the year, as the rate of price rises remains above target. Governor Andrew Bailey said interest rates "remain on a gradual downward path", but warned: "The world is highly unpredictable."
The Bank rate is the key benchmark for lenders setting the cost of borrowing, and for banks and building societies deciding what returns to pay to savers. There are concerns that the conflict between Israel and Iran, a major oil producer, could send energy costs higher and drive overall prices up, which would impact further rate decisions.
The decision will be announced by the MPC at 12:00 BST. The Bank said it was "sensitive" to events in the Middle East and the impact on oil prices, which could have knock-on effects for the UK economy.
When interest rates were cut in May from 4.5% to 4.25%, it was the fourth reduction in a year. It noted that since its last meeting in May, oil prices had risen by 26% while gas prices grew by 11%.
While the downward staircase of interest rates is expected to continue, there are some complicated and conflicting issues for the nine-member committee to consider. The bank marginally lifted its expectations for the UK economy but it said that underlying growth was "weak".
Growth in the UK economy remains somewhat sluggish, putting pressure on policymakers to cut rates to boost investment and growth. UK growth has been uneven so far this year, with the economy expanding strongly at the start of the 2025, before shrinking sharply in April.
The economy unexpectedly shrank by 0.3% in April after taxes increased for businesses, household bills jumped, and exports to the US plunged. There has been evidence that the pace of wage growth - which contributes to the rate of inflation - is slowing. At the same time, the UK's unemployment rate has risen and businesses are holding off on recruiting or replacing staff.
However, the rate of inflation remained at its highest level for more than a year in May, at 3.4%. "In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation," said Mr Bailey.
Food prices, in particular, jumped. As an essential for any household budget, that creates a further squeeze on personal finances. The Bank's base interest rate dictates the rates set by High Street banks and lenders.
The Bank uses interest rates as its primary tool for bringing inflation to its target level of 2%. A rise in rates can limit demand and therefore reduce inflation, although that has an impact on the economy. The higher level in recent years has meant people are paying more to borrow money for things like mortgages and credit cards, but savers have also received better returns.
Policymakers will also be closely monitoring the impact of global tensions. The conflict between Israel and Iran could well push up the price of oil. Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the chances of two interest rate cuts this year were "still on the horizon".
As well as affecting the price paid by drivers at the pumps, any sustained increase would have a significant effect on inflation. In every direction, there's a conundrum to confront, so policymakers have judged that pressing the pause button on rates is the best option for now.
Meanwhile, the fall-out from the US policy on tariffs will also need to be factored into their calculations. "Hopes for a summer rate reduction haven't completely faded, with bets ramping up that a cut in August could provide the rays of relief that borrowers have been waiting for," she added.
Many economists believe there will be two more interest rate cuts by the Bank this year. However, some others only expect one. Pressure growing on businesses
"We forecast inflation to remain above 3% for the remainder of the year amidst persistent wage growth and the inflationary effects from higher government spending," said Monica George Michail, associate economist at the National Institute of Economic and Social Research. Businesses appeared to be trimming wages for some workers to pay for the rise in employment costs that came into force in April.
"Additionally, the current tensions in the Middle East are causing greater economic uncertainty. We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year." Employers have been hit with a rise in the amount of National Insurance they are required to pay as well as increases to the minimum wage. The Bank estimated the policy changes by Chancellor Rachel Reeves have hiked wage bills by 10%.
How it affects you In the its survey of businesses, it said that pressure had grown on firms to recover the higher costs by raising prices but added "success is mixed".
Expectations for the Bank's base rate are influential in what High Street banks and lenders charge customers to borrow money or what they give to savers. Instead it said companies were using a range of measures to cut costs, including reducing pay rises for those workers just above the minimum wage level.
The higher level in recent years has meant people are paying more to borrow money for things like mortgages and other loans, but savers have also received better returns. Inflation remains above the Bank target of 2% at 3.4% in the year to May, and is expected to climb to 3.5% later this year. But it is expected fall back to around 2.1% next year.
More than eight in 10 customers have fixed-rate deals, and have been seeing increased bills when renewing in recent years. Interest rates are the Bank's main tool in try to maintain the annual rate of inflation at, or close to its target.
Fixed mortgage rates have been relatively static in recent weeks. The latest figures show the average rate on a two-year fixed mortgage was 5.12% while, for a five-year deal, it was 5.10%, according to financial information service Moneyfacts. The theory behind increasing interest rates to tackle inflation is that by making borrowing more expensive, more people will cut back on spending and that leads to demand for goods falling and price rises easing.
About 600,000 homeowners have a mortgage that tracks the Bank's rate, so any rate cut would have an immediate impact on monthly repayments. But it is a balancing act as high interest rates can harm the economy as businesses hold off on investing in production and jobs.