Key facts
- The Bank of England is expected to hold its benchmark interest rate at 3.75%.
- UK inflation for the year to May was 2.8%, below expectations.
- Food price rises slowed to a 17-month low.
- Transport costs saw the fastest price increase over the year to May.
- A US-Iran peace deal has been announced, easing geopolitical tensions.
- Oil prices have fallen due to expectations of the Strait of Hormuz reopening.
Policymakers at the Bank of England are widely expected to maintain the benchmark interest rate at 3.75% for a fourth consecutive meeting, as they closely monitor geopolitical developments in the Middle East. The decision comes as UK inflation remains above the target but has not escalated as severely as feared, partly due to a recently announced peace deal between the US and Iran.
Official figures released on Wednesday indicated that inflation for the year to May stood at 2.8%, with a notable slowdown in the pace of food price increases to a 17-month low. However, transport costs experienced the fastest rise over the same period. This inflation data, which was lower than anticipated, has bolstered expectations that the Monetary Policy Committee will refrain from increasing rates at their upcoming announcement.
Previously, the MPC had signaled potential rate hikes this year to combat inflation following an energy price shock linked to the conflict. The prospect of a US-Iran peace deal has eased some of these concerns, leading to a drop in oil prices as traders anticipate the reopening of the Strait of Hormuz, a critical global oil and gas supply route. Analysts suggest this could moderate energy and fuel price increases, making extreme inflation scenarios less probable.
Despite these developments, some analysts foresee inflation accelerating in the UK due to the lagged effect of higher wholesale energy costs on domestic gas and electricity prices. The regulator Ofgem's price cap is set to increase by 13% in July, impacting millions of households. Victoria Scholar, head of investment at Interactive Investor, described the current inflation data as "the calm before the storm."
Some market observers predict no further rate hikes for the remainder of the year, though the overall situation remains highly uncertain. In contrast, the European Central Bank recently raised its interest rate for the first time in nearly three years, citing inflationary pressures from the conflict. The Bank of England's base rate influences borrowing costs for customers, including mortgage rates and savings interest. As of June 17, average new two-year fixed mortgage rates have risen to 5.60% from 4.83% since the conflict began, with five-year deals increasing to 5.57% from 4.95%.