Bank of England Holds Rates at 3.75% as Iran Deal Eases Inflation Risk, June 20

The Bank of England held interest rates at 3.75% on June 18, with the Monetary Policy Committee voting 7-2 to keep borrowing costs unchanged. The decision came after a US-Iran peace deal reduced energy supply risks that had threatened to push inflation higher. The MPC remains cautious about inflation later in 2026, even as April CPI fell to 2.8%.

Rate Hold Reflects Energy Shock Relief

The MPC voted 7-2 to hold Bank Rate at 3.75% on June 18, down from an 8-1 split in April when one member pushed for a 25 basis point rise to 4%. The shift reflects the impact of a US-Iran peace deal signed on June 18 that aims to reopen the Strait of Hormuz and restore energy flows. The CBI noted the deal reduces the risk of the MPC’s most severe inflation scenario, making a rate rise much less likely even among hawkish committee members.

Inflation Pressures Remain Despite Softer Data

April CPI inflation fell to 2.8%, below the Bank’s 2% target. However, the MPC projects CPI at 3.1% in Q2, 3.3% in Q3, and rising further in Q4 before easing toward 2% in 2027. Energy prices remain elevated due to the Middle East conflict, and the Bank warned that wage growth could amplify domestic price pressures. A softer labour market should limit those risks, according to the CBI.

Government Debt Interest Costs Surge

Central government debt interest payable reached £11.7 billion in May 2026, up 54.4% from May 2025 and the highest on record for any May. Public sector borrowing hit £23.3 billion in May, 30.4% above May 2025. The Office for Budget Responsibility estimates £2.4 billion of the overshoot is due to higher debt interest driven by inflation from the Middle East conflict. Public sector net debt stands at 95.1% of GDP, the highest level since the early 1960s.

Rates Likely to Stay Flat Through 2026

Futures markets suggest no interest rate changes this year. The MPC will monitor wage growth and energy price pass-through closely in coming months. Some economists expect multiple hikes in 2026, but the Iran peace deal has reduced that probability. The Bank of England will publish its next Monetary Policy Report in August to reassess inflation risks.

Final Thoughts

The Bank of England’s hold reflects a shift from April’s hawkish tone as the Iran peace deal eases energy inflation fears. With rates likely flat through 2026 and debt interest costs surging, UK savers face continued pressure on returns while borrowers get temporary relief.

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