Bank of England leaves rates on hold, sterling falls
Bank of England's Interest Rate Decision and Market Reaction
LONDON, June 18 (Reuters) - The Bank of England kept interest rates steady at 3.75% on Thursday, as it has since the start of the U.S.-Iran war, judging it would be premature to raise rates now given the unclear strength of increased inflation pressures.
The rate-setting Monetary Policy Committee voted 7-2 to keep rates on hold, in line with economists' expectations in a Reuters poll, after external member Megan Greene joined Chief Economist Huw Pill in calling for a quarter-point rate rise.
Sterling extended its falls and was last down 0.6% at around $1.3212, its lowest levels since early April. The pound was also softer against the euro, which rose 0.25% to 86.71 pence.
The rate-sensitive two-year UK gilt yield was last up almost 7 basis points on the day at 4.2%, little changed from just before the rate decision.
London's FTSE stock index was last down 1%.
Expert Commentary on the Bank's Decision
Jeremy Batstone-Carr, European Strategist, Raymond James Wealth Management, France
"A peace deal between the United States and Iran, if it survives, removes a significant risk to future inflation and while rate-setters will not wish to take anything for granted, evidence suggests inflationary pressures are sufficiently contained at present to avoid having to take interest rates into even more restrictive territory. It is likely that senior officials will tolerate above-target inflation now on the basis that it is deemed likely to be temporary and that prevailing price pressures will slowly ease as the remainder of the year plays out."
Simon Dangoor, Head of Fixed Income Macro Investing, Goldman Sachs Asset Management, UK
"The BoE likely has room to assess the energy shock before taking decisive action. Recent dovish data is a reminder to the MPC that moving too soon could significantly dampen growth prospects. The weak labor market and already-restrictive rates could keep the BoE on pause; however, hiking pressure will likely build if there are disruptions in the re-opening of the Strait."
Luke Bartholomew, Deputy Chief Economist, Aberdeen, London
"The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures. But with the recent fall in energy prices and the softer inflation data yesterday, events are evolving in line with, or potentially even better, than the Bank’s scenario A from the last meeting, which was consistent with keeping rates on hold this year. And this is likely what is influencing most members of the Monetary Policy Committee."
Inflation Outlook and Future Policy
"Certainly, inflation has higher to move yet after the upcoming increase in the energy price cap. But the conditions don’t seem in place for sustained inflationary pressure. So we think the BoE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night. In fact, if energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year."
George Brown, Senior Economist, Schroders, London
"We think the bar for hikes remains high. A softer labour market and weak growth should help limit second-round effects, and progress on reopening the Strait of Hormuz should also reduce some of the more extreme upside risks to energy prices."
"But the Bank cannot afford to be complacent. If inflation expectations continue to drift higher, it may yet be forced to step in."
Madison Faller, Global Investment Strategist, JPMorgan Private Bank, London
"Holding patterns can still be hawkish. Today’s BoE meeting was all about subtext, and the message was one of buying time. The rear-view inflation prints have come in softer than expecd, but forward-looking signals from pricing surveys and BoE agents’ indications still point to upside risk. That takes some urgency out of hiking imminently, but it does not negate the need to keep a hawkish tone while policymakers wait for greater clarity in the data."
"We still think the balance of risks skews more towards a hike over the next year than not."
Michael Metcalfe, Head of Macro Strategy, State Street Markets, London
"The BoE is reverting to the 'Maradona theory' of monetary policy. Former governor Mervyn King used the analogy of Maradona’s second goal against England in the 1986 World Cup: he beat five defenders by running almost in a straight line because each expected him to move and reacted accordingly.
Communication as a Policy Tool
"The point is that central banks do not always need to raise rates aggressively when inflation rises; clear communication can do much of the work. That has been the story of 2026 so far. Faced with higher inflation, the BoE initially signalled the potential need for tighter policy and markets responded. But as the inflation shock fades, the message now is that the BoE may, like Maradona, still get to its goal without the need to move at all."
(Reporting by the Reuters Markets Team; Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)
