Bank of England holds rates at 3.75% as markets drop September hike bets
The Bank of England kept interest rates unchanged at 3.75%, signaling to markets that Middle East conflict-driven oil price spikes are unlikely to trigger sustained inflation across the UK economy.
The Bank of England held its benchmark interest rate steady at 3.75% on Thursday, defying expectations of a tightening cycle despite escalating conflict in the Middle East. Governor Andrew Bailey explicitly stated the central bank is not preparing investors for a future rate increase.
Financial markets quickly adjusted, with the implied probability of a rate hike in September falling sharply as the chance of no change rose from 53.6% to 73% by mid-afternoon. The decision was not unanimous, as policymakers Catherine Mann, Huw Pill and Megan Greene voted for an increase, warning that the collapse of a temporary truce between the US and Iran makes higher prices unavoidable.
Bailey characterized this split as a reasonable divergence of judgment but emphasized that the majority sees little evidence of second-order inflationary effects from oil prices feeding into broader goods and services. He stressed that UK interest rates are set solely to match domestic economic needs, rather than following the path of the Federal Reserve or the European Central Bank.
The central bank remains cautiously optimistic about domestic resilience. Chief economist Claire Lombardelli noted that while the UK economy remains relatively weak, it has proven more resilient than anticipated, and the bank does not expect a significant drop in consumer spending despite elevated business costs.
Across the Atlantic, economic data presented a mixed picture that underscores global vulnerabilities. US gross domestic product grew at an annualized rate of just 1.5% in the second quarter, missing the 2.1% forecast. Economists noted that while growth was supported by consumer spending linked to the World Cup, final sales to private domestic purchasers rose by a robust 3.9%.
Meanwhile, the Eurozone economy grew faster than expected in the second quarter, brushing aside similar concerns over the Iran conflict. In the corporate sector, Lloyds Banking Group announced a £2bn cost-cutting plan over four years, leveraging artificial intelligence to drive growth. Additionally, Airbus was fined £6.4m in the UK after admitting to breaches of rules designed to prevent sensitive military hardware from falling into the wrong hands.
