Interest rates held as Bank warns of impact of high energy prices

Uncertainty over the impact of high energy prices has led policymakers at the Bank of England to hold interest rates at 3.75%.

It is the fourth meeting in a row that the Monetary Policy Committee (MPC) has decided to leave rates unchanged.

Bank governor Andrew Bailey said recent drops in oil prices were "encouraging" but high energy prices during the war had still left "inflationary pressure in the pipeline".

The base rate is the primary tool used to control inflation and influences the cost of borrowing as well as the interest paid to savers.

The latest hold comes as the situation in the Middle East continues to be watched closely.

Policymakers said that oil prices remained higher than before the conflict and had "continued to be volatile". However, they said inflation expectations by the end of the year were now lower than the Bank had thought in April.

Interest rate policy, to maintain low inflation, would depend on the "scale and duration" of the energy price shock and how much that filtered through to the wider economy through prices and wage demands, they said.

"Oil prices have fallen in recent days, and that's encouraging," Bailey said.

"Whatever happens in the future, the higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline.

"The Bank's job is to make sure that doesn't turn into sustained inflation above our 2% target."

At the last meeting in April, the committee members voted 8-1 for a hold, with Huw Pill, the Bank's chief economist, the only one to vote for a rate rise.

This time, the vote was 7-2, with Megan Greene voting alongside Pill for an increase in the rate to 4%. She highlighted the uncertainty over the impact on households and businesses of higher energy prices.

The MPC met just before the US-Iran peace deal was signed and will meet again at the end of July, when its success and longevity should be clearer.

Speaking later, Bailey said he was "encouraged" by recent developments in the Middle East.

"Energy prices have come down quite a lot, but they're still above where they were before this conflict started. Inflation is higher than we expected it to be," he said.

"I think holding is the right position to be in at the moment for that, so I think it's a sensible decision in the light of the news."

The peace deal, which was signed on Wednesday, could lead to the reopening of the Strait of Hormuz.

Should oil start to flow freely again through the vital waterway - which normally carries a fifth of the world's oil and gas supplies - then concerns over a pick-up in inflation would be eased.

Price rises are still expected to accelerate in the UK, given the delayed impact of higher wholesale energy prices on domestic gas and electricity prices.

Millions of UK households' energy bills are governed by regulator Ofgem's price cap, which will increase by 13% in July.

However, the committee has lowered its overall inflation expectations since its last meeting in April, with an expectation that the rate will hit 3.25% in the final three months of the year. This is below even its most benign scenario outlined by the Bank earlier in the year, but still above the 2% target.

What's happening to UK interest rates and what does it mean?

Inflation unexpectedly steady as food price rises slow

UK economy contracts as Iran war impact felt

Official figures published on Wednesday showed that inflation remained at 2.8% in the year to May, as the pace of food price rises slowed to a 17-month low.

Over the year to May, transport costs rose by the fastest rate, the Office for National Statistics (ONS) said, while the rate of price increases in meat, dairy, and vegetables eased.

Meanwhile, ONS data released earlier on Thursday showed that firms were more cautious about taking on new staff, with the number of job vacancies at the lowest level for five years.

Last week, the European Central Bank opted to increase its interest rate for the first time in almost three years, noting that the conflict was "generating inflation pressures".

The Federal Reserve, the US central bank, held rates on Wednesday, although Fed governors were split on whether to keep rates steady or raise them to tame inflation.

Some analysts predict no further rises in the Bank of England's benchmark rate for the rest of the year, although the situation remains highly uncertain.

The Bank's base rate is what it charges other banks and building societies to borrow money, which influences what they charge their own customers for mortgages as well as the interest rate they pay on savings.

As of now, the average rate on a new two-year fixed mortgage deal is 5.59%, up from 4.83% at the start of March when the Iran war began, according to the financial information service Moneyfacts.

For those looking for a five-year deal, the average rate is 5.57%, up from 4.95% over the same period.