The Bank of England is poised to hold borrowing costs at 3.75% after better-than-expected inflation data and the promise of a US-Iran peace deal has taken a rate hike off the table, economists think.
New inflation data has reinforced expectations that policymakers will not need to increase interest rates at the next announcement on Thursday.
The official figures showed the rate of Consumer Prices Index (CPI) inflation stayed at 2.8% in May, the same as in April.
It was lower than expected by economists, who had predicted an uptick in inflation to 3%.
While remaining above the Bank’s 2% target level, the lack of movement in May will provide some relief to its Monetary Policy Committee (MPC) which uses interest rates as a tool to control inflation.
Furthermore, the next decision comes days after US President Donald Trump said a peace deal had been agreed with Iran, which is set to be signed on Friday and lead to the reopening of the Strait of Hormuz.
Mr Trump has said the deal would see oil flow freely again through the vital waterway, through which a fifth of the world’s oil and gas supplies are normally carried.
While the agreement is yet to be formally signed, the prospect has helped bring oil prices down close to levels seen before the Middle East conflict began.
Victoria Scholar, head of investment for Interactive Investor, said the “softer-than-expected inflation data strengthens the case for the Bank of England to keep interest rates on hold on Thursday”.
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But she added: “Its current strategy is to buy time to digest the extent of any inflation pass-through from this year’s Iran war energy shock.
“Despite falling oil prices and a peace deal between the US and Iran, UK inflation is expected to increase over the summer after the next Ofgem price cap in July, when we will likely arrive at peak inflation, so for now today’s data looks like the calm before the storm.”
UK inflation is still widely expected to accelerate over the coming months, as the impact of the Iran war feeds further into the economy.
The Bank will be keeping a watchful eye over the cost of living, and questions remain over whether policymakers will need to resort to raising interest rates later in the year.
Last week, the European Central Bank opted to increase its interest rate for the first time in almost three years, noting that the conflict was “generating inflation pressures”.
The US Federal Reserve will also announce its next interest rate decision on Wednesday evening and is widely expected to keep rates on hold.
