RESOLVING THE LEDGER
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The Bank of England kept its key interest rate on hold for the fifth time this year on Thursday after a bigger-than-expected drop in the inflation rate last month gave policymakers breathing space to assess the fallout from renewed fighting in Iran.
The bank’s monetary policy committee voted 6-3 to keep the rate at 3.75%, in line with the expectations of most economists. Policymakers have kept the rate at that level since December after four rate cuts in 2025.
The split decision highlights growing tensions within central banks around the world about how to respond to stubbornly high inflation and concerns that the war in Iran will lead to another round of price increases. The U.S. Federal Reserve on Wednesday kept its key rate at a range of 3.5% to 3.75%, with Chairman Kevin Warsh saying the Fed “will not hesitate to act” to keep inflation under control.
“The impact of the energy shock on the UK economy remains uncertain,” the committee said in a summary of its deliberations. The interest rate changes required to meet the inflation target “will depend on the scale and duration of the shock, and how it propagates through the economy,” it added.
But three policymakers disagreed, saying the potential inflationary effect of the recent surge in energy prices was too great to ignore, even though price spikes earlier in the war haven’t yet pushed up prices and wage demands in Britain. All three voted to raise rates by a quarter point to 4%.
“I remain concerned about more insidious second-round effects driven by catch-up dynamics in wage and price setting,” committee member Huw Pill said. “While these may be slower to emerge, they could prove more lasting and create greater intrinsic inflation persistence.”
Adjusting central bank interest rates, which serve as a benchmark for loans and credit cards, is the primary tool central banks use to control inflation. Higher rates make it more expensive to borrow money, tending to reduce spending and lower prices. Lower rates make it cheaper to borrow, tending to increase spending and boost prices.
Consumer price inflation in the U.K. slowed to 2.6% in the 12 months through June from 2.8% the previous month, according to the latest figures from the Office for National Statistics. While the drop was bigger than economists expected, inflation remained above the bank’s 2% target for a 21st consecutive month.
Renewed attacks by the United States and Iran in the Middle East sent oil prices soaring this month due to concerns about the continued disruption of traffic in the Strait of Hormuz, through which a fifth of all crude oil and natural gas traded once passed in peacetime
Brent crude, the benchmark for world oil prices, jumped to more than $100 a barrel on July 23 from less than $71 three weeks earlier as the ceasefire between the U.S. and Iran broke down. Brent crude traded for about $92 a barrel on Thursday.
In Britain, economists are also closely watching the tax and spending policies of new Prime Minister Andy Burnham to see if his efforts to shield consumers from rising prices and spur economic growth are likely to add to inflation.
This story was originally featured on Fortune.com
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