Bank of England Holds Rates at 3.75% as Bailey Tolerates Above-Target Inflation
Updated
Updated · The Guardian · May 29
Bank of England Holds Rates at 3.75% as Bailey Tolerates Above-Target Inflation
5 articles · Updated · The Guardian · May 29
Andrew Bailey said the Bank of England is in no rush to raise rates and can tolerate inflation above its 2% target while the Iran war clouds the outlook and UK growth stays weak.
3.75% borrowing costs are likely to remain in place through the summer because Bailey sees the current price shock as potentially temporary, though he warned tolerance would fade if second-round inflation effects emerge.
1 percentage point has already been added to new five-year fixed mortgage costs as markets scrapped expectations for 2026 rate cuts, prompting Bailey to argue financial conditions have effectively tightened without a formal move.
Markets had expected two cuts to 3.25% earlier this year, but now price in a 0.25-point rise to 4% before December as energy costs from the Iran war reshape global central-bank policy.
£3 trillion of UK government debt has also become costlier to finance after bond yields rose, though Bailey said the Bank is better prepared than in 2022 to stop another temporary energy shock becoming entrenched inflation.
While the Bank of England waits, are UK homeowners paying the price for the Iran war through soaring mortgages?
As global central banks split, is Britain's cautious path a wise strategy or a risky gamble against inflation?
Bank of England’s 2026 Policy: Balancing Inflation, Energy Shocks, and Economic Uncertainty
Overview
In April 2026, the Bank of England decided to keep its key interest rate unchanged, mainly due to the ongoing Iran war and its strong impact on global energy prices. This conflict has increased risks for both inflation and economic growth, creating uncertainty for the UK economy. The Bank’s cautious stance reflects a wider concern among central banks that high energy prices could drive up inflation and slow economic activity. As a result, the Bank of England is closely monitoring developments, ready to adjust policy if needed, but prefers to wait for clearer signals before making further changes.