The Bank of England has kept its benchmark interest rate unchanged at 3.75% for a fourth consecutive meeting, as policymakers balance easing inflation against signs of a cooling labour market and lingering uncertainty over energy-driven price pressures linked to the Iran war.
Governor Andrew Bailey and the Monetary Policy Committee maintained a cautious stance on Thursday, extending the pause that began in December 2025. The decision had been widely expected after fresh data showed UK inflation holding steady, alongside mixed signals from employment figures.
Official statistics released earlier in the week showed consumer prices rising 2.8% year-on-year in May, unchanged from April and slightly below economists’ forecasts of 3.0%. The reading marked the lowest level for headline inflation since early 2025 and suggested that price pressures may be stabilising.
However, the data also revealed uneven trends across the economy. Transport costs rose sharply to 6.8%, driven by higher fuel prices and more expensive air travel, while food inflation continued to ease to 2.2%. Housing-related costs also showed signs of moderation. Although inflation remains above the Bank’s 2% target, the figures eased concerns that the spike in global energy prices following the Iran conflict in late February would translate into a sharper domestic surge.
Bailey said recent declines in oil prices were “encouraging” but warned that energy costs remain elevated compared with pre-war levels. He added that higher prices over recent months have already created inflationary pressure in the pipeline, stressing that the central bank’s priority is to prevent this from becoming persistent inflation above target.
Market analysts expect further challenges ahead. Some economists warn that inflation could climb again later in the year as higher household energy bills filter through to consumers. Investment strategist Lindsay James noted that while inflation has surprised to the downside in the short term, it could approach 4% later this year due to the impact of the upcoming energy price cap adjustment.
The Monetary Policy Committee vote was not unanimous. Two members supported a 25-basis-point rate increase, reflecting concerns that energy-related pressures could re-ignite broader inflation.
The labour market data added further complexity. The unemployment rate unexpectedly fell to 4.9% in the three months to April, down from 5.0% in the previous quarter. However, payroll data showed a decline in employee numbers, suggesting underlying weakness despite the marginal improvement in headline unemployment.
Wage growth remained firm, with regular pay rising 3.4% year-on-year excluding bonuses. Economists say this resilience in earnings could sustain inflationary pressures even as hiring slows. Richard Carter of Quilter Cheviot said the labour market continues to lose momentum, while Deutsche Bank’s Sanjay Raja warned it is “not out of the woods yet,” though current conditions give policymakers more time to assess future trends.
The combination of stable inflation, weakening employment momentum and solid wage growth highlights the delicate balance facing the Bank of England as it navigates its next policy steps.
