BoE holds at 3.75% and trims inflation outlook

The Bank of England left Bank Rate unchanged at 3.75% at its June policy meeting, extending a run of four consecutive decisions to hold interest rates steady. The Monetary Policy Committee voted 7-2 to maintain the current level, with a majority concluding that an immediate move was not warranted.

Chief Economist Huw Pill and external member Megan Greene dissented, preferring a 25 basis point increase to 4%. Their stance underscored concern that underlying inflation pressures could still strengthen despite recent easing in headline inflation.

Official data showed UK consumer price inflation running at 2.8% year-on-year in May, unchanged from April. Against that backdrop, the Bank revised its near-term projections, now expecting CPI to be a little under 3% in the third quarter of the year.

For the final quarter, the projection has been trimmed to "a little over 3.25%", reflecting a softer inflation outlook than in April. Policymakers nonetheless warned that earlier increases in energy costs are still feeding through the economy and could keep price pressures elevated later in the year.

The Bank identified the conflict in the Middle East and associated volatility in global energy prices as the dominant source of uncertainty for the inflation outlook. It noted that energy prices have fallen since the previous meeting but remain higher than before the conflict and are still volatile.

Officials cautioned that persistently elevated energy costs risk triggering second-round effects, as firms and workers seek to recoup higher costs through prices and wages. Huw Pill warned of possible “catch-up dynamics” in wage and price setting that could sustain inflation above target.

Despite those risks, the MPC judged that raising rates now would be premature, given uncertainty over how strongly higher energy prices will pass through to broader inflation. The Bank also argued that reacting too quickly could generate “undesirable volatility” in the economy.

Governor Andrew Bailey described recent declines in oil prices as encouraging but said earlier high energy prices from the war had left inflationary pressure in the pipeline. Following the announcement, sterling weakened further against the dollar, extending earlier losses and falling to its lowest level since 7 April.