By Paul Hannon

The Bank of England left its key interest rate unchanged Thursday and joined other central banks in responding cautiously to signs that the Strait of Hormuz may soon reopen.

The key point

The U.K.'s central bank left its key interest rate at 3.75%, where it has been since December.

Prices of oil and natural gas have fallen since Iran and the U.S. said on Sunday that they have agreed on an interim peace deal, but remain above prewar levels.

Many details of the final peace agreement are yet to be settled, and it is unclear how quickly energy supplies that transit through the Strait of Hormuz will return to prewar levels.

For the BOE's Monetary Policy Committee, the potential peace deal means the risk of a sustained pickup in inflation has been reduced, but not entirely eliminated.

So while it seems less likely to most policymakers that they will need to increase borrowing costs this year, they still haven't ruled it out.

Other central banks have taken a similarly cautious approach to the prospect of a lasting peace deal. The Bank of Japan Tuesday warned that it may raise its key rate again after lifting borrowing costs to their highest level in 31 years, while the European Central Bank's chief economist said borrowing costs in the eurozone may be lifted again.

"I would respond promptly to any signals that an extended period of elevated energy prices could be leading to stronger possible second-round effects," said BOE Gov. Andrew Bailey.

Indeed, two of the nine MPC members voted for a rise in the key interest rate to 4%, arguing that tighter policy is needed to contain the inflationary pressures that have already built up since the war began in late February.

"We should insure against the possibility of larger second-round effects until we have evidence to determine they are not materializing," said Megan Greene, one of four MPC members who don't work full-time for the BOE.

The context

The Fed Wednesday left its key rate unchanged, but officials signaled that their next move may be to raise rates. Earlier in the day, Sweden's central bank warned that despite the interim peace deal, the probability of a rate rise later in the year had risen.

"With the Strait set to reopen it is tempting to think that the global rate-hiking cycle is already over," said Dario Perkins, an economist at TS Lombard. "That assessment looks wrong. Underlying inflation remains too high and growth is set to reaccelerate."

Also Thursday, the central banks of Indonesia, the Philippines and the Czech Republic raised their key rates. The central banks of Switzerland and Norway left policy unchanged Thursday, but said the outlook for growth and inflation remains uncertain as a result of the conflict.

"If developments turn out as currently envisaged, the policy rate will be raised at one of the forthcoming monetary policy meetings," said Norges Bank Gov. Ida Wolden Bache.

The jump in energy prices that accompanied the war has yet to raise the U.K.'s annual rate of inflation, unlike most other parts of the global economy. At 2.8% in May, it was lower than the rate of price increases recorded in February, to the surprise of the central bank and most economists. However, household energy prices are set to rise by 13% from July, a development that is likely to lift inflation above 3%.

In contrast to the U.S. and the eurozone, there have been signs that the U.K. jobs market is cooling, although figures released earlier Thursday recorded a surprise drop in the rate of unemployment during April.

The economy contracted in April after a strong start to the year, and the BOE's own surveys indicate that businesses don't believe demand is strong enough to allow them to raise prices to such an extent that they would keep profit margins intact.

What's next

Despite its warning that an increase in borrowing costs may yet be needed to contain inflation, more economists now expect the BOE's next move to be a rate cut unless the conflict in the Middle East flares up again or the process of reopening the Strait of Hormuz is protracted.

"In the benign scenario that now appears more likely, we think that the next move will be a cut, in December," said Andrew Wishart, an economist at Berenberg Bank.

Before the start of the conflict, the BOE had expected to lower borrowing costs by half a percentage point this year. Policymakers believe an interest rate of 3.75% restrains activity.

"If the conflict resolution holds, and risks diminish, lower rates could be preferred," said Alan Taylor, a professor of economics at Columbia University who is another of the MPC's external members.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

June 18, 2026 08:53 ET (12:53 GMT)

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