UK interest rates kept on hold with Bank alert to ‘highly unpredictable’ world

UK interest rates have been left on hold as the Bank of England said it was keeping watch on a “highly unpredictable” world amid rising energy prices.

The Bank’s Monetary Policy Committee (MPC) decided to keep rates unchanged at 4.25%.

In a split vote, with six members opting to hold and three preferring to cut, the MPC said a “gradual and careful approach” to reducing borrowing costs continued to be the right course of action.

‘Unpredictable’

Bank governor Andrew Bailey said: “Interest rates remain on a gradual downward path, although we’ve left them on hold today.

“The world is highly unpredictable.”

He added that there were “signs of softening in the labour market” – referring to indicators including slower hiring and wage growth easing – which were being closely watched to see how far they feed into UK inflation.

Middle East

The committee said it was alert to concerns about conflict in the Middle East, which has escalated in recent days with attacks between Israel and Iran.

In the minutes of the MPC’s meeting, it noted that there had been “rapid geopolitical developments”, adding: “Energy prices had risen owing to an escalation of the conflict in the Middle East.

“The committee would remain vigilant about these developments and their potential impact on the UK economy.”

It echoes similar remarks made by the US’s central bank which also opted to keep interest rates on hold on Wednesday.

Global oil and natural gas prices have surged in recent weeks, which threatens to push up energy costs in the UK.

Furthermore, the MPC noted that Donald Trump’s tariff policy was posing risks to global trade and continuing to create uncertainty.

But it said that deals struck between the US and other countries, including the UK, meant that the direct impact of the “trade shock” on global growth could be smaller than it had forecast last month.

Meanwhile, the decision to keep rates on hold came as UK Consumer Price Index (CPI) inflation remained above the Bank’s 2% target level, coming in at 3.4% last month.

The jobs market was also starting to cool, with the rate of unemployment ticking up and pay growth starting to ease.

The Bank said its network of agents had found that cost pressures from the beginning of April – including national insurance contributions rising – had put pressure on firms to recover them by raising prices.

As well as price hikes, it noted that businesses had been leaning on other actions to mitigate costs, including reducing their workforce, staff hours, salaries, and absorbing into profits.

It also pointed to waning business sentiment amid weak growth in the UK economy, with demand not expected to recover until 2026.