Introduction: Bank of England interest rate decision today
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
UK households and businesses could be spared a rise in borrowing costs today, as the British economy creaks under the strain from the Iran war.
The Bank of England is widely expected to leave interest rates unchanged at 3.75% at noon today, after its latest monetary policy committee meeting.
Policymakers at the BoE will try to balance the challenge of containing imported inflation from the Middle East conflict, while avoiding intensifying the squeeze on firms and consumers who have been hit by the rise in energy costs.
With the economy shrinking slightly in April, and inflation lower than forecast in May (we learned yesterday), a hike in borrowing costs appears unnecessary. The City of London money markets indicate there’s a 98% chance that interest rates are left on hold, and just a 2% chance of a rise.
Tomasz Wieladek, chief European macro economist at investment management firm T. Rowe Price, argues that the Bank may not need to tighten monetary policy at all in the coming months.
Monetary policy in the UK appears to be finally working. A prolonged period of restrictive monetary policy has, to a degree, weakened inflation dynamics.
Given the good news on inflation and the recent decline in oil prices, the MPC will likely conclude that no more hikes are necessary to stabilise inflation in the UK.
The agenda
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7am BST: UK labour market data
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Noon BST: Bank of England interest rate decision
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1.30pm BST: US initial jobless claims
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1.30pm BST: Philadelphia Fed Manufacturing Index
Key events
BoE: Middle East is “dominant source of uncertainty” for inflation
Announcing today’s interest rate decision, the Bank of England says that the conflict in the Middle East, and its impact on energy prices and the UK economy, remained the “dominant source of uncertainty for the inflation outlook”.
The minutes of this week’s meeting say:
As had been outlined in the April Monetary Policy Report and Minutes, monetary policy could not influence global energy prices. And it would take time for monetary policy to work through the economy, so any action the MPC might take would not prevent higher inflation in coming months. What the MPC would do is set monetary policy to make sure that the effects of the shock did not become embedded into broad-based inflationary pressures, so that inflation fell back to the 2% target and stayed there.
Pill and Greene wanted rate rise
Bank of England chief economists Huw Pill again voted to raise interest rates, as he also did at the last meeting (and was outvoted then too).
But this time he had company – external MPC member Megan Greene also voted to increase rates to 4%.
Bank of England leaves interest rates on hold
Newsflash: The Bank of England has voted to leave UK interest rates on hold.
In a decision widely expected by economists, the BoE is maintaining Bank rate at 3.75%.
The decision is not unanimous, though – two policymakers wanted to hike interest rates to 4%, but were outvoted by the other seven who voted to hold rates.
Announcing the decision, the Bank says:
Global energy prices have fallen since the previous meeting in response to events in the Middle East. But they remain higher than pre-conflict and have continued to be volatile.
The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably.
The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy.
The Bank of England had cut rates six times since mid-2024 and was expected to continue doing so, before Trump’s Operation Epic Fury led to Iran choking off oil supplies from the Gulf.
The BoE’s MPC will almost certainly keep interest rates on hold today, and probably in July as well, reports Professor Costas Milas, of the University of Liverpool’s Management School.
He explains:
First, as Dr Papapanagiotou and I show in a brand new blog published today for LSE Business Review, a model which takes into account UK economic policy uncertainty (EPU) in addition to output growth and inflation developments (Chart 3 in the blog) is quite impressive at forecasting BoE’s policy rate. EPU is currently elevated, not least because of today’s by-election, and this will put off MPC members for hiking.
Second, and as we discuss in the LSE Business Review blog, the BoE has been looking at interest rate rises in three different scenarios, depending on oil prices hitting $108 or $130 per barrel. Following the 60-day “deal” between the US and Iran, oil currently trades at less than $75 currently. All in all, my expectation is that the MPC will hold both today and on July the 30th!
Britain’s stock market is in the red ahead of the Bank of England’s interest rate decision, due in 15 minutes time.
The FTSE 100 share index is down 107 points, or just over 1%, at 10,401 points. That follows losses on Wall Street last night, after the US Federal Reserve was more hawkish than expected.
Other European markets are faring better, with Germany’s DAX and France’s CAC both up over 0.1%.
The US dollar has climbed to its highest level in over a year, after America’s central bank indicated it could raise interest rates later this year.
Half the policymakers at the Federal Reserve predicted there would be at least one increase in US interest rates this year. The Fed also left rates on hold last night, as expected.
This has pushed the dollar index up to its highest level since May 2025.
Badenoch pledges City reforms in economic ‘revolution’
Kalyeena Makortoff
Conservative leader Kemi Badenoch has called on City firms to back her at the next election, promising sweeping reforms to boost risk-taking, at a time when, she says, “the rest of the world is eating London’s lunch”.
She has told executives gathered in Westminster’s QEII Centre this morning that a Conservative government would usher in an economic “revolution”, that would involve scrapping:
Badenoch said this is part of a UK growth plan that will revitalise the UK’s powerhouse financial sector, which she says is “smothered in red tape”, being burdened by taxes, and has lost a quarter of its stock market listings over the past decade.
She added:
Every great enterprise is built on risk. The desire for a zero risk environment means Britain’s financial services sector is now more regulated in any of the major markets in the world. It is cheaper and easier to do business elsewhere. The rest of the world is eating London’s lunch.
Reception to Badenoch’s speech was mixed, with some people in the audience grimacing at her proposals, and others nodding in enthusiastic agreement as her assessment of the red tape and taxes holding back the City.
It’s worth keeping in mind that the Labour government is currently planning to reform the ring-fencing regime, and that there isn’t a consensus among bankers – with Barclays having been a vocal opponent to changing the protections that cost so much to implement in the first place.
The Labour government is also looking at reforming the FOS, following heavy lobbying by banks embroiled in the motor finance scandal, in part by aligning it more closely with FCA rules.
Badenoch clearly believes this does not go far enough.
The Bank of England may not be unanimous in its interest rate decision, due in just over an hour’s time.
A Reuters poll found that City economists predict seven of the nine MPC policymakers will vote to leave interest rates on hold, with two pushing for a rise.
At last month’s meeting, the Bank voted 8-1 to hold rates, with BoE chief economist Huw Pill the lone vote for a rate hike.
Kathleen Brooks, research director at XTB, says:
At the last meeting, one member dissented and voted in favour of a hike. We could see a similar 8-1 split in favour of no change, later today.
Hawks at the BOE, including Megan Greene, are likely to point to the high levels of input inflation, which could eventually boost consumer prices. Added to this, inflation will rise in July, due to the 13% rise in the energy price cap.
The market will hope that the spike in price pressures caused by the energy price cap is temporary and does not lead to a wage-price spiral in the UK.
IEA: All actors know strait of Hormuz could be closed again
The head of the International Energy Agency has warned that the Iran war has shown that the strait of Hormuz could be closed again in future.
Speaking in Istanbul, IEA chief Fatih Birol welcomed the interim agreement to end the Iran war and called for the strait of Hormuz to be reopened without conditions.
He added:
We will now see the details of the agreement and the negotiation process, and what happens next.
Echoing comments made to the Guardian in April, Birol added:
The vase is broken.
Now all actors know that the strait of Hormuz was closed once and it can be shut down again.
Britain ‘strongly minded’ to nationalise British Steel
The UK government has declared it is “strongly minded” to nationalise British Steel, having taken control of the company from its owners Jingye Steel.
Nationalisation of the Scunthorpe steelworks already looked likely, after the Steel Industry (Nationalisation) Bill was introduced to Parliament earlier this month.
In a written ministerial statement today, the government says:
The government is strongly minded to use the powers in the bill to bring British Steel into public ownership in the future, subject to the public interest being satisfied.
Jingye, though, won’t let the steelworks go lightly, or indeed cheaply. It has begun a formal process under an international treaty to win compensation from the UK government.
Lloyd’s: Practical steps needed before strait of Hormuz traffic can resume
Insurance market Lloyd’s say six “practical steps” must be taken before vessels that have been stranded in the Gulf for the last 110 days can resume transiting the strait of Hormuz.
Sheila Cameron, CEO at the Lloyd’s Market Association and Neil Roberts, head of marine and aviation at the Lloyd’s Market Association, say:
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The first step is the importance of cooperation between Iran, US and other states such as Oman on navigational safety and the prioritisation of vessel passage.
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The second is verified mine clearance and ongoing surveillance. The threat of mines remains a significant barrier to the resumption of trade in the region. Ongoing monitoring of the seaways is required to provide reassurance and confidence to shipowners and their crew, particularly when it comes to vessels who are considering re-entering the Gulf in the future.
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The third is clarity of provision of emergency services support in the event of a vessel or crew requiring rescue whilst in Iranian territorial waters. In order to return to the ‘shipping as usual’ state, ordinary salvage and maritime services, including for incoming vessels, should be readily available.
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Fourth, vessels will need to be fully restored to a seaworthy state prior to transiting the Strait, including GPS services, and there are reports of issues, such as stores, fuel and bottom scraping, from vessels as a result of being at anchor for such an extended period.
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Fifth, there needs to be a full reopening of the port infrastructure system, including pilotage, berthing and bunkering, to enable the safe loading and discharge of cargos.
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And finally, clarity around sanctions, terrorism legislation and toll payments. There must be clear advice and consistency of approach from the UK, EU and US on the extent to which sanctions and designations of Iranian entities have been amended. The MoU refers to shipments of Iranian oil and that there will be no toll payments. However, a greater level of detail will be required before insurers and insureds can be clear as to what trade can safely take place.
Gas price fall to lowest since start of Iran war
UK wholesale gas prices have fallen to their lowest level since the start of the Iran war.
The month-ahead UK gas price fell as low as 95p per therm this morning, following the signing of the interim peace deal by the US and Iran.
That’s the lowest since 2 March, the Monday after the conflict began. Reminder: Brent crude oil has also fallen to its lowest since 2 March today (see earlier post).
However, this still leaves UK gas prices above their level just before the start of the war – 78.57p per therm.
Continential European gas prices have also fallen today, down 3% to €40.6 per megawatt hour.
Hopes for a resumption of traffic through the strait of Hormuz are pushing down energy costs, despite concerns that it will take time for the situation to return to pre-war levels.
Oxford Economics say:
With the new US-Iran ceasefire including an agreement to reopen the Strait of Hormuz, Oxford Economics anticipates an initial surge in traffic as ships that have been stuck are finally able to exit. Flows are then expected to slow until confidence builds that the ceasefire is durable. The firm expects the recovery in shipping to be gradual as logistics are adjusted and oil and gas production restarts
Three Saudi-flagged supertankers sail through Hormuz after Iran deal signed
In a sign that oil flows from the Middle East are returning to normal, three Saudi-flagged supertankers with six million barrels of crude onboard have sailed through the Strait of Hormuz, ship tracking data showed on Thursday.
The sailings from Saudi ports were the biggest departures through the strait in weeks, according to Reuters analysis of shipping movements.
Oil prices to ease, not plummet, after US-Iran deal, IMF chief predicts
The head of the International Monetary Fund has predicted that oil prices are likely to ease, not plummet, as the U.S.-Iran interim peace deal lets shipments through the Strait of Hormuz resume.
IMF chief Kristalina Georgieva pointed out that countries will want to replenish oil reserves which were run down during the conflict, and that it will take time for maritime traffic through the Strait to return to normal, Reuters reports.
Georgieva was speaking at a “fireside chat” at a conference hosted by the Austrian National Bank.
Oil has already eased quite a long way in the last week. Brent crude is now trading around $78 a barrel, down from $95.50 a week ago, having hit a peak over $126 a barrel at the end of April. Before the Iran war began, Brent was trading around $72 a barrel.
Norway follows Switzerland by leaving rates on hold
It’s a busy day for central bankers.
In Oslo, Norway’s central bank has kept its policy interest rate on hold at 4.25%, but hinted that rate rises could be on the way.
Governor Ida Wolden Bache says:
Inflation is too high, and the rapid rise in business costs in recent years will contribute to keeping inflation elevated ahead. New information indicates that inflation pressures are slightly stronger than we had anticipated earlier.
We expect that a somewhat tighter monetary policy stance will be needed to bring inflation down to target within a reasonable time horizon. If developments turn out as currently envisaged, the policy rate will be raised at one of the forthcoming monetary policy meetings”.
Switzerland’s central bank has left interest rates on hold.
The Swiss National Bank voted to keep its key interest rate at zero for a fourth quarterly meeting, after inflation rose to 0.6% in May, saying:
Inflation has risen in recent months as a result of higher energy prices. Medium-term inflationary pressure, however, is virtually unchanged compared with the last monetary policy assessment.
The SNB’s monetary policy is appropriate to keep inflation within the range consistent with price stability and it supports economic development. The SNB will continue to monitor the situation and adjust its monetary policy if necessary, in order to ensure price stability.
