Bank of England expected to hold interest rates at 3.75% amid Middle East volatility

The Bank of England is expected to hold its benchmark interest rate at 3.75% for a fifth consecutive time when policymakers announce their decision at 12:00 BST. This widespread expectation reflects a cautious approach from the Monetary Policy Committee amid global political and economic uncertainty.

The committee’s primary mandate is to keep inflation at a target of 2%, but recent data shows prices rising faster than desired. Official figures indicate UK inflation stood at 2.6% in the year to June, remaining above the central bank's target.

Millions of households across England, Scotland and Wales are now facing a 13% increase in domestic energy prices. This surge is a direct consequence of the Iran war and ongoing conflict in the Gulf, which have driven up wholesale energy costs and complicated the outlook for a lasting truce.

For the broader economy, this holding pattern signals that relief from high borrowing costs is not imminent. Many analysts now believe the next movement in the base rate is more likely to be a rise than a cut, given the volatile geopolitical landscape.

Katie Horne from savings platform Flagstone noted that a new government finding its feet alongside Middle East uncertainty makes a hold a welcome dose of stability. She added that a temporary pause eases pressure on people who have endured significant uncertainty over the past year.

Mortgage market pressure

While a rate hold leaves monthly repayments for tracker mortgage holders unchanged, the majority of borrowers are not insulated from market shifts. More than eight in 10 UK mortgage customers are on fixed-rate deals, and major lenders have recently been increasing rates on new products.

The average rate on a new two-year fixed deal has reached 5.62%, the highest level in over a month, according to Moneyfacts. Lenders are raising these rates because their own funding costs are increasing due to renewed Middle East volatility, prompting the sector to move collectively to manage application volumes.

David Hollingworth of mortgage broker L&C warned that market expectations must ease before lenders consider cutting rates again. Meanwhile, Bank of England projections indicate that just over five million homeowners will see their monthly mortgage repayments increase by the end of 2028.

Conversely, the sustained higher interest rate environment provides a distinct advantage for savers. Financial institutions are offering improved returns for those willing to lock away their capital, with the top guaranteed interest rate on a one-year bond reaching 4.91%.

This represents the highest rate for new customers since October 2024. Rachel Springall of Moneyfacts described this as a rare dose of good news and a silver lining for savers after years of poor real returns.