Bank of England holds rates at 3.75% as Iran war fuels inflation fears

The Bank of England held its key base rate at 3.75% on July 30, 2026, as its Monetary Policy Committee voted six to three to keep borrowing costs unchanged. The decision came amid escalating conflict in the Middle East and a renewed surge in oil prices above $90 a barrel.

Households and businesses across the UK face continued cost-of-living pressures, with the Bank warning that a prolonged Iran war could push inflation above 4% next year. In an adverse scenario where oil stays above $100 a barrel, inflation might peak at 4.5% by mid-2027, according to the Bank’s forecast.

The split vote reflects deep divisions among policymakers. External members Catherine Mann and Megan Greene, along with Chief Economist Huw Pill, dissented in favor of an immediate quarter-point rise to 4%. Mann, Greene, and Pill had previously been outvoted at the last meeting, signaling persistent hawkish concerns about entrenched inflation.

Official figures show UK inflation fell more than expected to 2.6% in June, down from a peak of 3.8% last year. However, the Bank’s central forecast, which assumes oil prices fall back to about $71 a barrel, still sees inflation peaking around 3.2% later in 2026 due to higher fuel and energy costs. Brent crude briefly topped $100 a barrel last week before retreating, but traded above $90 on Thursday.

Governor Andrew Bailey acknowledged the mixed picture, stating that while inflation has fallen faster than expected, volatile energy prices from the Middle East conflict will cause it to rise again. He emphasized the Bank’s commitment to ensuring any increase is temporary and returns to the 2% target. The Bank also noted that a loose labor market and higher borrowing costs would gradually reduce inflation.

In a related development, new Prime Minister Andy Burnham announced a support package in his first week, including removing VAT from electricity bills to cut them by an average of £45 a year from October. The Bank expects this, along with a £2 bus fare cap, to trim headline inflation by 0.1 percentage point. Meanwhile, the US Federal Reserve held rates steady on Wednesday under new Chair Kevin Warsh, but US borrowing costs rose to their highest since 2007 amid doubts about the Fed’s ability to contain the energy price shock.