Bank of England holds interest rates at 3.75% amid Iran war peace prospects

A person shields themselves from the rain while walking near the Bank of England building on the day the Monetary Policy Committee lowered interest rates, in London, Britain, Dec.18, 2025.

Toby Melville | Reuters

The Bank of England held U.K. interest rates at 3.75% on Thursday, as policymakers continue to balance the need to address above-target inflation with lackluster economic output.

The hold, which was in-line with the expectations of economists polled by Reuters, was backed by seven of the nine monetary policy committee members in the BOE's May meeting.

It comes as higher energy costs in the wake of the Iran war have pushed inflation higher in economies across the globe, and the U.K. — a net energy importer — is particularly vulnerable to price shocks.

The U.K.'s own inflation rate held at a cooler-than-expected 2.8% in May, with price rises driven by rising transportation fuel costs, while data published last week showed the economy shrank by 0.1% in April.

Inflation cooled to 2.8% in April, but the drop — attributed to a change to the U.K.'s regulated energy price cap — was expected to be short-lived. The price cap is due to rise by 13% later this summer, when energy costs will hit a 2-year high.

But despite Washington and Tehran reaching a breakthrough in peace negotiations, markets are still betting that the Bank of England will raise rates by the end of the year, according to LSEG figures.

At its April meeting, the Bank of England's Monetary Policy Committee voted to keep its key interest rate at 3.75%.

Ahead of the meeting, LSEG data showed traders were pricing in a 96% chance of the central bank keeping its key rate unchanged.

Central banks confront inflation

It comes after the Federal Reserve also opted to keep U.S. interest rates on hold, with the federal funds rate maintained at 3.5%-3.75%, as expected. However, investors were unnerved by Kevin Warsh's first meeting as Fed chair, with major averages swooning in response to some hawkish signals.

Last week, the European Central Bank became the first major central bank to raise its key interest rate in response to the energy crisis brought on by the Iran war. The Bank of Japan followed on Tuesday, lifting its policy rate to a 31-year high of 1%.

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