The Bank of England (BoE) left its benchmark interest rate unchanged at 3.75% on Thursday, maintaining a cautious stance as policymakers warned that an escalation of the conflict in the Middle East could reignite inflationary pressures in the UK.

The Monetary Policy Committee (MPC) voted 6-3 to keep rates on hold. Three members, including Chief Economist Huw Pill, Catherine Mann, and Megan Greene, voted in favour of an immediate 25-basis-point rate hike, highlighting ongoing concerns over inflation.

In its latest assessment, the BoE warned that if the conflict involving Iran were to intensify and keep oil prices above US$100 per barrel for an extended period, UK inflation could rise to 4.5% by mid-2027. Such a scenario would reverse recent progress in bringing inflation closer to the central bank's 2% target and place renewed pressure on household living costs.

Despite these risks, BoE Governor Andrew Bailey dismissed speculation that the central bank is preparing to tighten policy further. He stressed that weak domestic economic growth and a softer labour market continue to limit underlying inflation pressures.

"There's nothing to suggest the Bank is moving towards raising interest rates," Bailey said following the policy announcement, adding that policymakers remain focused on balancing inflation risks against slowing economic activity.

Recent UK data has provided some relief. Consumer inflation eased to 2.6% in June, down from 3.8% last year, supported by softer domestic price pressures. The BoE expects inflation to rise modestly later this year due to higher energy costs before gradually easing, assuming oil prices retreat towards US$71 per barrel under its central forecast.

The central bank also noted that government measures, including lower electricity bills and capped bus fares, are expected to slightly reduce headline inflation over the coming months.

Markets had widely anticipated the BoE would leave interest rates unchanged, with investors still expecting borrowing costs to rise to 4.0% before the end of the year if inflation remains persistent.

The BoE's decision follows the U.S. Federal Reserve's move to keep interest rates unchanged earlier this week, as major central banks continue to navigate the balance between slowing inflation and geopolitical risks. Rising tensions in the Middle East have kept energy markets volatile, with Brent crude briefly trading above US$100 per barrel before retreating below US$90.

Looking ahead, policymakers reiterated they stand ready to adjust monetary policy if inflationary pressures become more persistent. However, the outlook remains highly dependent on developments in global energy markets and the evolving geopolitical situation.

For now, the BoE continues to favour a wait-and-see approach, monitoring inflation, economic growth, and oil prices before making its next policy move.

 
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