The "Wait and See" Pivot: Why the Bank of England Held Rates at 3.75% as Iran Peace Hopes Rise

 

The "Wait and See" Pivot: Why the Bank of England Held Rates at 3.75% as Iran Peace Hopes Rise

**Subtitle:** *From a 7-2 split vote to a 3.25% inflation forecast, the BoE is playing for time. Here is why the pause might be the riskiest move of the year.*

**Reading Time:** 9 Minutes | **Category:** Economy & Markets

## Introduction: The Calm Before the Storm

Just one week ago, the European Central Bank raised interest rates for the first time since 2023, firing a warning shot across the global economy [0†L42-L43]. The day before, the U.S. Federal Reserve hinted at a potential rate hike before the end of the year. The world's major central banks were tightening their belts.

Then, something unexpected happened.

On Wednesday, June 17, the United States and Iran signed an interim peace deal, the "Versailles MOU," extending their ceasefire and reopening the possibility of oil flowing freely through the Strait of Hormuz [3†L24-L29][6†L39-L41]. Oil prices, which had flirted with $108 a barrel during the war's peak, crashed below $80 for the first time in three months [10†L19-L20][3†L20-L21].

On Thursday, June 18, the Bank of England did something that surprised no one—and everyone at the same time. It held interest rates steady at **3.75%** for the fourth consecutive meeting [1†L10-L12][5†L25-L26].

The vote was **7-2**, with Chief Economist Huw Pill and external member Megan Greene dissenting, both calling for an immediate 25-basis-point hike to 4% [1†L22-L23][6†L14-L16]. The majority, however, chose to wait.

“For now, the [BoE] is playing for time rather than going on the attack,” said George Brown, senior economist at Schroders [9†L33-L34].

This is the story of that decision—and why it matters for your wallet, your mortgage, and the global economy.

> **The Bottom Line Up Front:** The Bank of England held rates at 3.75% in a 7-2 vote, as the US-Iran peace deal pushed oil prices below $80 and eased the most extreme inflation scenarios. But with two hawkish dissenters and energy price caps set to rise 13% this summer, the battle against inflation is far from over. The BoE is waiting to see if the peace holds—and if it doesn't, the next move could be a hike.

## Part 1: The 7-2 Vote That Hid a Growing Rift

For the fourth time since December 2025, the Bank of England's Monetary Policy Committee (MPC) kept the benchmark interest rate at **3.75%** [1†L10-L12][5†L25-L26]. But beneath the surface of the "hold" decision, a significant crack has appeared in the committee's consensus.

### The Dissenters: Pill and Greene

At the April meeting, the vote was **8-1**, with only Chief Economist Huw Pill calling for a hike [7†L22-L24]. This month, the vote widened to **7-2**, as external member Megan Greene joined Pill in voting for an immediate quarter-point increase to 4% [1†L22-L23][6†L14-L16].

Greene highlighted the uncertainty over the impact on households and businesses of higher energy prices [7†L25-L27]. Pill, who has been consistently hawkish, remains concerned that higher energy prices could feed into wages and corporate prices [9†L18-L20].

“The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures,” said Luke Bartholomew, deputy chief economist at Aberdeen [8†L33-L34].

### The Majority View

The seven members who voted to hold argued that the recent fall in energy prices and softer inflation data justified patience [8†L35-L37]. They noted that the labor market continues to loosen, with 64,000 jobs lost since the start of the Iran war [10†L29]. Regular private-sector pay growth has slowed to its weakest level in five years [10†L30].

“The conditions don’t seem in place for sustained inflationary pressure,” Bartholomew added [8†L40-L41].

### The Governor's Balancing Act

Governor Andrew Bailey struck a careful tone. He said the recent drops in oil prices were "encouraging" but warned that high energy prices during the war had still left "inflationary pressure in the pipeline" [7†L8-L9][9†L27-L30].

“Whatever happens in the future, the higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline,” Bailey said [7†L19-L21].

| MPC Vote | April 2026 | June 2026 |

| :--- | :--- | :--- |

| **Hold** | 8 | 7 |

| **Hike** | 1 | 2 |

| **Dissenters** | Huw Pill | Huw Pill, Megan Greene |

*Source: Bank of England [1†L22-L24][7†L22-L24]*

**The Human Touch:** For the millions of UK mortgage holders, the 7-2 vote is a reminder that the committee is deeply divided. Two members believe inflation is a bigger threat than growth. Seven believe the opposite. The outcome of that debate will determine whether your monthly payment goes up or stays the same.

## Part 2: The Iran Peace Deal—A "Game Changer" for Inflation

The single most important factor in the Bank's decision was the US-Iran peace deal, signed just one day before the MPC meeting [7†L27-L28].

### The Oil Crash

The war had effectively closed the Strait of Hormuz, a critical shipping route that normally carries about a fifth of the world's oil and gas supplies [7†L30-L31][6†L47-L48]. Oil prices had spiked to nearly $120 a barrel [3†L20-L21].

The peace deal changed the calculus. Oil prices fell below $80 a barrel for the first time in three months [10†L19-L20][3†L9-L10]. The agreement, which extends the ceasefire for at least 60 days and allows for the reopening of the strait, has eased investors' most pessimistic inflation scenarios [3†L44-L46][10†L17-L18].

“A peace deal between the United States and Iran, if it survives, removes a significant risk to future inflation,” said Jeremy Batstone-Carr, European strategist at Raymond James Wealth Management [8†L19-L20].

### The Inflation Forecast Revision

The Bank responded by lowering its forecast for peak inflation in the fourth quarter of 2026 from 3.6% to **3.25%** [10†L20-L21][7†L37-L38]. While still above the 2% target, it is a significant improvement from the Bank's earlier projections.

“We think the bar for hikes remains high,” said George Brown, senior economist at Schroders [8†L46].

### The Caveat

Despite the optimism, the Bank warned that the situation remains unpredictable. Governor Bailey noted that oil prices, while down, are "still higher than before the war" [9†L27-L28]. The Bank also cautioned that the peace deal's success and longevity would need to be clearer before it could fully adjust its policy [7†L28-L29].

**The Human Touch:** For the family budgeting for the summer, the peace deal is a lifeline. Lower oil prices mean lower gasoline prices, lower transportation costs, and, eventually, lower food prices. The Bank's decision to hold rates is a bet that the peace will hold. If it does, the relief will be real. If it doesn't, the pain will return.

## Part 3: The Energy Price Cap—The 13% Time Bomb

While the peace deal has eased fears, the Bank's decision is not without risks. The most significant of these is the looming increase in the UK's energy price cap.

### The July Increase

Millions of UK households' energy bills are governed by regulator Ofgem's price cap, which will increase by **13% in July** [7†L35-L36][6†L31-L32]. This increase, driven by higher wholesale energy prices during the war, will push energy costs to a two-year high [6†L32-L33].

### The Delayed Impact

The Bank noted that the impact of higher wholesale energy prices on domestic gas and electricity prices is delayed [7†L33-L34]. The full effect of the war on household energy bills has not yet been felt. This is why the Bank expects inflation to rise later this year, despite the recent cooling [10†L23-L24].

### The "Pipeline" Inflation

Governor Bailey was explicit about this risk. “The higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline,” he said [7†L19-L21].

The Bank's job, he added, is to make sure that doesn't turn into sustained inflation above its 2% target [7†L21-L22].

| Metric | April Forecast | June Forecast | Change |

| :--- | :--- | :--- | :--- |

| **Q4 2026 Inflation Peak** | 3.6% | 3.25% | -0.35 pp |

| **Energy Price Cap Increase** | N/A | 13% (July) | +13% |

| **Oil Price (Peak)** | ~$108 | ~$80 | -26% |

*Sources: Bank of England [10†L20-L21][7†L35-L36]*

**The Human Touch:** For the household that has already been struggling with high energy bills, the 13% increase in July is a gut punch. The Bank's decision to hold rates means borrowing costs won't rise—but energy bills will. The peace deal may have lowered oil prices, but it hasn't lowered the bills that are already in the pipeline.

## Part 4: The Weakening Economy—A Counterweight to Inflation

If the energy price cap is the bad news, the weakening economy is the good news—at least for borrowers.

### The Jobs Picture

Official data released on Thursday showed that 64,000 jobs have been lost since the Iran war started in February [10†L29]. Regular private-sector pay growth has slowed to its weakest level in five years [10†L30]. Job vacancies are at their lowest level for five years [7†L48-L49].

### The Growth Slowdown

The UK economy shrank by 0.1% in April, weighed down by the energy shock [6†L26-L27]. The Bank noted that tighter financial conditions since the start of the Middle East conflict provided insurance against inflation risks, allowing it to keep rates on hold [10†L31-L33].

### The "Soft Landing" Scenario

The combination of slowing growth and easing inflation is the classic "soft landing" scenario. If it holds, the Bank may be able to avoid the kind of aggressive tightening that the European Central Bank has already started and that the Fed hinted at [8†L42-L43].

“If energy prices continue to moderate then the debate could once again turn again to rate cuts,” said Luke Bartholomew of Aberdeen [8†L43-L44].

### The Hiking Pressure

However, the Bank cautioned that hiking pressure will likely build if there are disruptions in the re-opening of the Strait [8†L31-L32]. The two hawkish dissenters made it clear that they are watching closely.

**The Human Touch:** For the worker who has just lost their job, the debate over interest rates feels abstract. For the small business owner struggling to stay afloat, the Bank's decision to hold rates is a small relief. The economy is weakening. The Bank is hoping it weakens just enough to tame inflation—but not enough to tip into recession.

## Part 5: The Global Divergence—Why the BoE Is Out of Step

The Bank of England's decision to hold rates puts it out of step with other major central banks.

### The ECB's Hike

Just one week before the BoE's decision, the European Central Bank raised its policy rate by 25 basis points to 2.25% [10†L34-L35][0†L42-L43]. It was the ECB's first hike since 2023, driven by concerns over the energy shock.

### The Fed's Hawkish Hint

The day before the BoE's decision, the U.S. Federal Reserve left rates unchanged but hinted at a potential rate hike before the end of the year [10†L33-L34]. Markets are pricing in a better-than-even chance of a hike at the September meeting.

### The BoE's "Playing for Time" Strategy

The BoE's decision to hold, while the ECB is hiking and the Fed is hinting at hikes, reflects the UK's unique position. The UK is a net energy importer and is particularly vulnerable to price shocks [6†L18-L19]. The economy is weaker than the US and the eurozone. And the labor market is showing signs of strain.

“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,” said Luke Bartholomew of Aberdeen [8†L41-L43].

| Central Bank | Latest Move | Next Expected Move |

| :--- | :--- | :--- |

| **Bank of England** | Hold at 3.75% | Uncertain (hike or cut) |

| **European Central Bank** | Hike to 2.25% | Potentially more hikes |

| **U.S. Federal Reserve** | Hold at 3.50-3.75% | Hike by year-end |

*Sources: BoE [10†L33-L35], ECB [0†L42-L43], Fed [10†L33-L34]*

**The Human Touch:** For the global investor, the divergence between central banks creates opportunities and risks. For the UK borrower, it means the path of interest rates is more uncertain than ever. The BoE is charting its own course—and the markets are watching closely.

## Part 6: The Market Reaction—Sterling Falls, Gilt Yields Rise

The market's reaction to the decision was immediate and telling.

### Sterling Falls

The pound extended its falls, dropping 0.6% to around $1.3212, its lowest levels since early April [8†L13-L14]. The pound was also softer against the euro, which rose 0.25% to 86.71 pence [8†L14-L15].

### Gilt Yields Rise

The rate-sensitive two-year UK gilt yield rose almost 7 basis points on the day to 4.2%, little changed from just before the rate decision [8†L15-L16]. London's FTSE stock index was last down 1% [8†L17].

### The "Hawkish" Hold

The market interpreted the decision as a "hawkish hold." Despite the peace deal, traders in swaps markets continued to expect one quarter-point BoE rate rise by the end of the year, and a small chance of a second, according to trading after the decision was released [9†L38-L41].

**The Human Touch:** For the investor, the market reaction is a signal that the peace deal has not fully erased the risk of a rate hike. For the borrower, it is a reminder that the cost of borrowing could still go up before the year is out.

## Part 7: The Road Ahead—What to Expect in 2026

The Bank of England's decision to hold rates is not the end of the story. It is the beginning of a new phase.

### The "Wait and See" Approach

The Bank has made it clear that it will continue to monitor the situation in the Middle East and how its impact spreads through the economy [10†L36-L37][9†L44-L45]. The next MPC meeting is at the end of July, when the success and longevity of the peace deal should be clearer [7†L28-L29].

### The Two Scenarios

**Scenario A: Peace Holds**

If the peace deal holds and oil prices continue to moderate, the Bank could maintain its pause. Inflation expectations would ease, and the debate could turn to rate cuts, though that might have to wait until next year [8†L43-L44].

**Scenario B: Peace Fails**

If the peace deal unravels and oil prices spike again, the Bank would face intense pressure to hike. The two hawkish dissenters have already signaled their readiness to act [8†L33-L34]. The Bank's governor has also indicated that he would respond "promptly" to any signs of widening inflationary pressures [9†L25-L26].

### The "Yellow Card" Warning

George Brown of Schroders described the current situation as a "yellow card" from a couple of hawkish dissenters, but the majority are content to wait [9†L34-L35]. The question is whether that yellow card will turn red.

**The Human Touch:** For the family planning their budget for the rest of the year, the "wait and see" approach is both a relief and a source of anxiety. The Bank is not hiking now—but it could hike later. The peace deal is holding—but it could break. The uncertainty is the only certainty.

## Frequently Asked Questions (FAQ)

**Q: What did the Bank of England decide on June 18, 2026?**

A: The Bank of England held its benchmark interest rate steady at **3.75%** for the fourth consecutive meeting. The Monetary Policy Committee voted **7-2** to keep rates unchanged, with two members calling for a hike to 4% .

**Q: Why did the Bank of England hold rates?**

A: The Bank held rates because the US-Iran peace deal pushed oil prices below $80 a barrel, easing inflationary fears. The Bank also cited a weakening labor market and slowing growth as reasons to pause .

**Q: What is the UK's current inflation rate?**

A: UK inflation unexpectedly held steady at **2.8%** in May 2025, unchanged from the 13-month low reached in April .

**Q: How did the Iran war affect UK inflation?**

A: The Iran war effectively closed the Strait of Hormuz, spiking oil prices and pushing up energy costs. The UK, as a net energy importer, was particularly vulnerable .

**Q: What is the UK energy price cap?**

A: The energy price cap, set by regulator Ofgem, limits the amount energy suppliers can charge households. It is set to increase by **13% in July 2026**, pushing energy costs to a two-year high .

**Q: Will the Bank of England raise rates in 2026?**

A: Markets are pricing in a better-than-even chance of a rate hike by the end of 2026, according to LSEG figures . The Bank's governor has said he would respond "promptly" to any signs of widening inflationary pressures .

**Q: How does the Bank of England's decision compare to other central banks?**

A: The European Central Bank raised rates by 25 basis points to 2.25% earlier in June, while the U.S. Federal Reserve left rates unchanged but hinted at a potential hike by year-end .

**Q: What does the BoE decision mean for my mortgage?**

A: The hold means your mortgage rate is unlikely to change immediately. However, if the Bank hikes rates later in the year, variable-rate and tracker mortgages will become more expensive.

**Q: What does the BoE decision mean for savers?**

A: Savings rates are likely to remain static for now, as the base rate has not changed . However, if the Bank hikes later in the year, savings rates could improve.

**Q: When is the next Bank of England meeting?**

A: The Monetary Policy Committee will meet again at the **end of July 2026** .

## Conclusion: The "Yellow Card" Pause

We started this article with a number: **3.75%**. That is the Bank of England's interest rate, unchanged for the fourth consecutive meeting.

We end with a different number: **7-2**. That is the vote split that reveals a growing divide within the committee.

The Bank of England is playing for time. The US-Iran peace deal has eased the most extreme inflation scenarios. Oil prices have fallen. The labor market is weakening. The majority of the MPC believes it can afford to wait.

But the two hawkish dissenters are a warning. If the peace deal unravels, if energy prices spike again, if the 13% energy price cap increase feeds into broader inflation, the Bank will be forced to act.

“Rising inflation expectations have earned a yellow card from a couple of hawkish dissenters,” said George Brown of Schroders. “But the majority are content to wait” .

**For the Borrower:**

The pause is a relief, but do not assume it will last. If you have a variable-rate mortgage, consider fixing your rate. The window of opportunity may not be open for long.

**For the Saver:**

The hold is disappointing, but not surprising. Savings rates are likely to remain static for now. If the Bank hikes later in the year, your patience may be rewarded.

**For the Investor:**

The global divergence between central banks creates opportunities. The BoE is playing for time. The ECB is hiking. The Fed is hinting at hikes. Watch the oil price. It will tell you which direction the BoE will eventually move.

**The Bottom Line:**

The Bank of England held rates at 3.75% in a 7-2 vote, as the US-Iran peace deal pushed oil prices below $80 and eased inflationary fears. But with two hawkish dissenters and a 13% energy price cap increase looming, the battle against inflation is far from over. The BoE is waiting to see if the peace holds. If it doesn't, the next move could be a hike.

The yellow card has been shown. The red card is still in the referee's pocket.

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**#BankOfEngland #InterestRates #UKInflation #IranPeaceDeal #OilPrices #MonetaryPolicy #MPC #Economy**

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*Disclaimer: This article is for informational purposes only. It does not constitute financial advice. Interest rates, inflation, and economic conditions are subject to rapid change. Always consult a licensed professional before making financial decisions.*