British economy

Published on 18/06/2026 – 13:20 GMT+2•Updated
13:35

The Bank of England left its benchmark interest rate unchanged at 3.75% on Thursday, extending a pause that began in December 2025, as policymakers weighed the inflationary fallout from the Iran war against signs of resilience elsewhere in the economy.

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Governor Andrew Bailey and fellow Monetary Policy Committee members were widely expected to keep rates on hold and maintain a broadly neutral stance on future policy moves.

The decision came a day after official figures showed UK inflation holding steady. Consumer prices rose 2.8% year-on-year in May, unchanged from April and below economists’ expectations of 3.0%, leaving the headline rate at its lowest level since early 2025.

However, the stable reading masked diverging trends beneath the surface. Transport costs accelerated sharply to 6.8%, driven by higher fuel prices and rising air fares, while food inflation eased to 2.2% and housing costs continued to moderate.

Though inflation remains above the bank’s target of 2%, the figure raised hopes that the upward pressure on prices emanating from the spike in oil and gas prices after the start of the Iran war on 28 February may have been less than anticipated.

Andrew Bailey, the bank’s governor, said the recent fall in oil prices has been “encouraging” while noting they are still higher than before the war.

“Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline,” he said. “The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”

Analysts also cautioned that inflation could still accelerate later this year, as higher household energy bills feed through to prices. Lindsay James, investment strategist at Quilter, said: “Whilst inflation was below expectations in May and currently under 3%, it is still likely to jump closer to 4% later in the year due to the coming impact of a higher energy price cap.”

James added that while oil prices have retreated from recent highs, they remain above last year’s levels, suggesting underlying inflation pressures have not fully disappeared.

The decision to hold the key interest rate was not unanimous, with two of the nine Monetary Policy Committee members voting for a quarter-point rate increase, reflecting concerns that higher energy costs could still feed through into broader inflation pressures.

A labour market losing momentum

Thursday’s labour market release painted a mixed picture.

The unemployment rate dipped unexpectedly to 4.9% in the three months to April, down from 5.0% in the first quarter, yet payrolled employee numbers fell over the period, pointing to an underlying loss of momentum even as the headline jobless rate improved.

Wage growth, a metric the Bank of England watches closely for signs of persistent price pressure, held firm, with regular pay excluding bonuses rising 3.4% on the year.

“The labour market is still continuing to lose momentum, with the latest figures showing a further cooling,” stated Richard Carter, head of fixed interest research at Quilter Cheviot.

Sanjay Raja, chief UK economist at Deutsche Bank, struck a similar note, cautioning that “it’s clear that the labour market is not out of the woods yet,” though he added that the mixed data buys the committee more time to wait and see how the economy evolves.

The combination of cooling headline inflation, a softening jobs market and still-robust pay growth underscores the bind facing the committee. Strong earnings keep alive the risk of so-called second-round effects, where higher wages feed back into prices, even as hiring loses steam.

Current events are causing all sorts of problems, according to a currency exchange expert

Brits heading abroad this summer are being given a new warning.

Towards the close of last week, Sterling dropped to a three-week low against the Euro and a five-week low against the US Dollar, spelling trouble for Britons travelling overseas. The decline, according to a foreign exchange expert, stems from two key factors.

Tony Redondo, founder of Newquay-based Cosmos Currency Exchange, explained: “Firstly, markets are worried that Britain is heading towards a period of political instability. Secondly, they are worried about how the UK economy will cope with an expected rise in inflation.

“Though inflation fell to 2.8% today, it is expected to rise, potentially sharply, in the months ahead as the impact of rising oil prices due to the conflict in the Middle East hits the UK economy in full. If markets believe higher inflation makes UK gilts a not–so-safe bet, that will apply further downward pressure on Sterling.”

Tony noted the weakened Pound was hammering holidaymakers venturing abroad, as their money was now “plummeting” in value against currencies like the Euro and Dollar – a situation that “could get worse in the weeks and months ahead”.

However, he highlighted that a struggling domestic economy and Sterling’s persistent fragility was prompting an increasing number of businesses to fundamentally reconsider how and where they sell their services.

Tony added: “If they’re anything, the UK’s businesses are resilient and proving they can adapt. During 2026 to date, we’ve seen a sharp rise in UK businesses moving away from difficult domestic conditions and looking for customers overseas.

“Rather than having all their eggs in one UK economic basket, a growing percentage of UK firms are now marketing and selling their products and services online to customers in Europe, America, Canada, Australia and even Singapore and Hong Kong.

“If there’s one silver lining to the weak UK economy, it’s that many traditionally domestic UK small businesses have become international ones, as they cast their nets ever wider in search of customers and profit.

“The ability to ply your trade internationally has never been easier and it can massively boost a company’s bottom line.”