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30 July 2026, 13:37 UTC Chief Investment Office GWM Investment Research

UK: Bank of England holds interest rates, but inflation worries persist Blog Dean Turner, Economist, UBS AG, UBS AG London Branch Maelle Quillevere, Economist, UBS AG London Branch Constantin Bolz, CFA, Strategist, UBS Switzerland AG Geoff Wan, CFA, Analyst, UBS AG London Branch

The Bank of England left the Bank Rate unchanged at 3.75% at its July meeting in a 6-3 vote, with Megan Greene, Huw Pill, and Catherine Mann favoring an immediate 25-basis-point increase. The split matters. While policy remained unchanged, the presence of three votes for a hike underlines the Committee's continuing concern about the inflationary consequences of the latest energy shock. The decision therefore carried a distinctly hawkish tone and was consistent with the cautious approach adopted by other major central banks in recent weeks.

The key change for the Monetary Policy Committee (MPC) relative to the previous meeting is that domestic and external inflation dynamics have diverged. On the domestic side, the data have broadly evolved in the MPC's favor. Headline inflation fell to 2.6% in June, services inflation moderated further, wage growth continued to slow, and labor market indicators pointed to increasing slack. Economic growth also remained subdued. Taken together, these developments reinforce the view that concerns about inflation persistence, which has troubled policymakers over recent years, have continued to fade. In addition, the data show little sign of material second-round effects for now.

Yet, given the volatile backdrop for energy prices, the Committee can no longer focus solely on domestic inflation. Oil, gas, and refined fuel prices remain well above pre-Iran conflict levels and are likely to push inflation higher over the remainder of this year. To be sure, policymakers are less concerned about the temporary rise in inflation itself than about whether higher energy prices feed into wage bargaining, inflation expectations, and firms' pricing decisions. The Committee's attention therefore remains focused on the risk of second-round effects that could make inflation more persistent.

Crucially, the MPC also judged that financial conditions had tightened materially since the escalation of the conflict. Higher market rates and financing costs for households and firms are already exerting additional restraint on the economy, reducing the immediate need for a Bank Rate increase. This was a key factor behind the majority's decision to remain on hold despite acknowledging that risks to the inflation outlook remain skewed to the upside and may require a stronger policy response later.

This report has been prepared by UBS AG London Branch, UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document.

In our view, the Bank's latest forecasts and scenarios point to a prolonged period of unchanged interest rates. While the conflict in the Middle East remains unresolved, policy decisions and communications are likely to retain a hawkish tone. The MPC's central message is that policy will remain restrictive for as long as necessary to ensure that higher energy prices do not become embedded in inflation expectations or wage-setting behavior. Only once energy prices stabilize and domestic disinflation continues is attention likely to shift back toward eventual policy easing.

Market pricing continues to point to further tightening from the Bank this year which, in our view, still looks ambitious. To be sure, if clear evidence of second-round effects emerges, we expect policymakers will not hesitate to tighten policy. However, interest rates at current levels, together with the broader tightening in financial conditions facing households and firms, are likely to be sufficient to ensure that inflation returns to the Bank's 2% target over the medium term. For now, the MPC appears comfortable remaining on hold while it monitors whether the latest energy shock proves temporary or develops into a more persistent inflation problem.

Value in sterling bonds and the pound In fixed income, we believe the cheapness of rates make GBP-denominated bonds overall…