Bank of England HOLDS interest rates at 3.75% despite inflation shock

The Bank of England held interest rates at 3.75 per cent today despite the inflation shock caused by the Iran war.

In an eagerly anticipated announcement, the central bank left rates unchanged as it grapples with the fallout from the conflict in the Middle East.

But it is feared the Bank will be forced to raise rates later this year to keep a lid on inflation as the closure of the Strait of Hormuz drives up oil and gas prices.

That would spell misery for millions of households and businesses by pushing up the cost of mortgages and other loans.

The Bank of England held interest rates at 3.75% despite inflation shock

The price of oil hit $126 a barrel on Thursday morning – the highest level since the aftermath of Russia’s invasion of Ukraine four years ago.

That eclipsed the $119.50 a barrel seen in early March – the previous high of the Iran conflict – and fuelled fears of a punishing jump in inflation.

Central banks typically raise rates to bring down inflation and cut them once prices are back under control.

Before war broke out in the Middle East, the Bank expected inflation to return to the 2 per cent target later this year, potentially paving the way for interest rate cuts.

But it is now feared inflation could hit 4 per cent or even 5 per cent later this year – forcing the Bank to raise interest rates.

This, however, could tip the economy into recession by driving up the cost of borrowing.

Mortgage rates have already risen sharply since the start of the war as financial markets bet the Bank will raise rates later this year.

Nick Leeming, chairman of estate agent Jackson-Stops, said: ‘The Bank of England’s decision to hold interest rates provides a welcome sense of stability for the housing market, offering reassurance after a sustained period of elevated borrowing costs following the inflation shock.

‘This is not a comfortable pause. The Bank continues to be pulled in two directions, with inflation proving sticky while growth and household demand show signs of softening. That balance is keeping policymakers cautious about signalling any imminent policy easing.

‘For the housing market, the implication is that borrowing conditions are likely to remain elevated for longer than many had anticipated earlier in the year. While mortgage pricing has already adjusted to a more stable rate environment, expectations for meaningful near-term relief in borrowing costs are likely to remain constrained.’

Professor Joe Nellis, an economic adviser at accountancy firm MHA, said: ‘With the prospect of interest rate cuts this year quickly diminishing, households face prolonged pain as borrowing costs remain elevated for longer. Businesses, already cautious, are likely to pull back further as financing remains expensive and demand uncertain.

‘The long-term picture of the UK economy is still uncertain, but it is becoming clearer that weak growth, coupled with rising inflation pressure, will be a defining characteristic.’