The Bank of England is widely expected to keep its benchmark interest rate unchanged at 3.75% as policymakers balance weak economic growth against the risk of renewed inflationary pressures from the escalating conflict between the US and Iran. UK inflation eased to 2.6% in June, largely reflecting lower fuel prices during a brief lull in Middle East tensions, but the recent resurgence in hostilities is expected to keep price pressures elevated and inflation above the Bank’s 2% target.
The outlook offers little political relief for Prime Minister Andy Burnham, who has pledged to reduce living costs but has yet to explain how his proposals would be funded. Governor Andrew Bailey has acknowledged concerns over the renewed conflict but said it has not materially changed the UK’s inflation outlook. While most economists anticipate that interest rates will remain on hold through the end of the year, financial markets are still pricing in a quarter-point increase by November.
