Interest Rates Are ‘On The Table’, says Andrew Bailey

Andrew Bailey told business leaders that cutting interest rates is “off the table at the moment”, a clear sign that the Bank of England will keep borrowing costs on hold when its rate partners meet at the end of the month.

The governor said that while financial markets had spent the first half of the year betting on more cuts, the war in Iran had forced policymakers to pause. Speaking at the European Central Bank’s annual conference in Sintra, Portugal, Mr Bailey put it bluntly: “It was expected that we would lower rates this year.

For the millions of small and medium-sized firms that have spent the last 18 months waiting for cheap credit, it’s an unwelcome message. Markets now expect the Bank to keep the Bank Rate steady at 3.75 per cent for the rest of the year, leaving mortgages, property funds and commercial mortgages on hold for the long term.

Mr Bailey was at pains to stress that relaxation is not a hawkish curve. He confirmed that he has chosen not to support any increases so far this year, pointing to growing evidence that the economy and labor market are losing strength.

“We have a developing economy, so we see a soft labor market, we see a soft job,” he said. “We have that before hostilities break out in the Gulf.”

That’s a negative bond towards Threadneedle Street. On domestic evidence alone, the case for policy relaxation is mounting. But rising oil and gas prices caused by the conflict threaten to push inflation higher, and the Bank is unwilling to add fuel to that fire. By holding in March, Mr Bailey noted, the Bank had taken “that easing off the table”, lending rates rising by a full percentage point as a result.

The situation is consistent with the warning the Bank issued earlier in the summer, when it warned of “rising” global uncertainty after leaving fixed exchange rates. It also coincides with the situation among firms themselves, with business confidence waning as the conflict in the Middle East continues.

Members of the Bank’s Monetary Policy Committee, which sets rates, will “revisit all the evidence” when they meet on July 30, the Governor said. At their last meeting on 18 June, they voted 7-2 in favor of holding it at 3.75 per cent, a decision confirmed in the Bank’s own monetary policy summary for June.

What’s keeping policymakers awake is not the headline number but what economists call the second-round effect, the risk that a single energy hike will be baked into daily wages and prices. “We are very focused on the risks of electricity prices passing through indirect effects, things like food prices and second round effects,” Mr Bailey said. “It is clear that we do not want inflation to be fixed.”

Inflation stood at 2.8 percent in May, well within the 2 percent target range. But it is now forecast to rise back by 4 percent later this year as the war in Iran eats into energy costs for homes and factories alike. This route would be unthinkable in the spring, when markets are pricing in a steady procession of cuts. The change has been so dramatic that some analysts have even suggested that the Central Bank may raise rates as the oil shock from the Middle East war causes inflationary panic.

There is a distinctly British wrinkle to all of this. Because the UK’s energy prices reset every three months, the impact of rising fuel prices on inflation figures is delayed rather than accelerated, a shortfall that makes the Bank’s job more difficult to read.

In May, the regulator Ofgem increased the rate of annual household energy bills by £221 to £1,862 following the increase in oil and gas prices. That new price went into effect on July 1 and will continue until September 30, meaning full inflation still applies to the system.

For SME owners, the takeaway is tough: the cheap borrowing that many have penciled into their cash flow plans for 2026 is not coming soon, and rising energy costs will squeeze margins on both sides of the ledger. The July 30 decision is unlikely to bring relief. In current form, businesses can best hope that the Bank doesn’t blink otherwise.