Bank of England holds interest rates despite Iran war inflation threat – as it happened

August 3, 2026 admin

The Bank of England held bank rate steady at 3.75% on Thursday, but three of its nine rate-setting members said it should have tightened monetary policy to combat inflation from the Iran war.

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Yet despite what some economists described as a “hawkish hold”, market-implied probabilities suggest the chances of a rate hike at the next meeting in September have gone down. The implied probability of no change in September rose from 53.6% just before the meeting to 73% by mid-afternoon.

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Governor Andrew Bailey repeatedly told reporters at a press conference in London that the Bank was not preparing investors for a rate hike in the future, and that he was fairly comfortable that there was little evidence of inflationary pressures from oil prices feeding through to other goods and services in the economy.

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The conflict started by the US and Israel hangs over every economic question at the moment. Iran shut the strait of Hormuz in response to the bombing campaign, shutting in millions of barrels a day of oil production. Central bankers are trying to wrestle with what that means for inflation across the world.

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Catherine Mann, one of the independent members of the Bank of England’s monetary policy committee, joined her colleagues, Huw Pill and Megan Greene, in voting for a rate hike today. Mann said the collapse of a temporary truce between the US and Iran probably meant higher prices were unavoidable, so higher rates were needed to counter that.

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Bailey characterised the disagreement as a reasonable divergence of judgments, but said the majority on the committee thought that evidence of second-order effects was lacking – even if inflation will rise later in the year because of higher oil prices.

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In other business and economics news today:

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US GDP grew by 1.5% annualised, slower than expected

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US borrowing costs rose to their highest since the global financial crisis

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Lloyds Banking Group will cut another £2bn of costs as part of a four-year plan under which its chief executive will use new tech and AI to drive growth.

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Eurozone GDP grew faster than expected in the second quarter despite concerns over the Iran war.

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London’s FTSE 100 rose to a new high as mining companies and Rolls-Royce gained ground.

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Shell doubled its profits in the second quarter thanks to the Iran war oil price jump

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BAE Systems and Rolls-Royce upgraded profits as defence spending surges

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Airbus was fined £6.4m in the UK after the European aerospace company admitted to breaches of rules designed to stop sensitive goods such as military hardware falling into the wrong hands.

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Laptops, mobile phones and documents have been seized after officials carried out search warrants in a crackdown on claims companies plaguing people with spam text messages about the car finance mis-selling scandal.

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Thanks for reading today, and please do join me tomorrow for more business, economics and financial markets. JJ

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Breaking away from the Bank of England for a few seconds, US GDP growth has been reported at 1.5% annualised in the second quarter – below the 2.1% expected by economists.

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Neil Birrell, chief investment officer of Premier Miton, an asset manager, said:

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The US economy might not be in quite as good health as we thought it was, with, albeit slightly historic, GDP data falling short of expectations. But it’s unlikely to be improving today, with hostilities in Iran hanging heavily over the world. The Fed is worried about inflation, but we should also be worried about the growth trajectory.

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Bank of England governor Andrew Bailey says higher energy prices will push up inflation in the coming months, as he starts his press conference.

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However, Bailey says there is little evidence that inflationary pressures are becoming embedded in the UK economy. In fact, there is underlying disinflation – slowing price growth – in the UK, he says.

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The UK’s economic growth is expected to grind to a halt in the third quarter of this year as the effects of the US-Israeli war on Iran weigh on demand, the Bank of England said.

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Its updated forecasts said underlying GDP growth is projected to slow to around 0% in the third quarter.

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Economic growth for 2026 is estimated to be 1.1% under its central scenario, with 1.1% growth again in 2027 and 1.7% in 2028.

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The Bank of England’s monetary policy committee said that the impact of the Iran war on prices “remains uncertain”, but that inflation is expected to rise later this year.

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It said:

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In response to events in the Middle East, crude and refined energy prices have remained volatile and higher than pre-conflict. The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy including via financial conditions.

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CPI inflation has fallen to 2.6% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through. The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist. There is little evidence so far to suggest such effects, and there have continued to be clear signs of underlying disinflation in recent data.

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The Bank of England has maintained bank rate at 3.75%.

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However, Catherine Mann joined Huw Pill and Megan Greene in voting for rates to rise.

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More to follow.

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of the Bank of England, Andrew Bailey makes a speech at the annual financial and professional services dinner at Mansion House, in London, on 14 July.”,”caption”:”Governor of the Bank of England, Andrew Bailey makes a speech at the annual financial and professional services dinner at Mansion House, in London, on 14 July.”,”credit”:”Photograph: Yui Mok/Reuters”}},{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

The Bank of England’s monetary policy committee (MPC) will have decided whether to hold interest rates well before the US Federal Reserve announced its decision last night. However, Bank governor Andrew Bailey will be mindful of that reaction when he talks to the media later this afternoon.

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The Bank’s decision is due at midday, with most economists expecting no change. But the question is whether it will be a “hawkish hold” – signalling the likelihood of future hikes.

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Suren Thiru, chief economist at the Institute of Chartered Accountants (ICAEW), said:

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An interest rate hold at midday looks a near certainty, as the recent run of more dovish economic data should give rate-setters enough comfort to look through the twists and turns of the US-Iran conflict for now.

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While the monetary policy committee’s vote split is likely to remain 7–2 in favour of holding rates steady, elevated oil prices will likely reaffirm its hawkish stance, keeping a future rate rise on the table.

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The Bank is publishing new economic forecasts in its monetary policy report. They could show an improved economic outlook, but everything will be overlaid by worries over the course of energy prices if – as seems to be the case today – Donald Trump wants to continue waging war on Iran.

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Andrew Wishart, senior UK economist at Berenberg, an investment bank, said:

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We expect the Bank of England (BoE) to leave its Bank Rate unchanged at 3.75% tomorrow, but threaten to raise interest rates if energy prices rise a lot more or evidence of second-round effects surfaces. This provides a convenient insurance policy for the BoE: every time the Iran conflict flares up, investors revise up their interest rate expectations and mortgage borrowing costs rise, immediately squeezing demand and reducing the risk of persistent inflation.

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Some analysts say that the BoE must eventually follow through on its threat for it to remain credible. Recent history argues otherwise – immediately after the 19 March BoE meeting, the market priced in two 25pb hikes to 4.25% by this week’s meeting. Neither has materialised, yet investors continue to price in two or three hikes. We do not think that the BoE will follow through with its threat to raise interest rates for two reasons: 1) Inflation in wages and services prices – the part of inflation that the BoE can best influence – continue to trend lower. 2) We think US President Donald Trump wants to avoid high oil prices because high petrol prices would damage the Republican party’s chances in the 3 November mid-term elections.

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US government borrowing costs have hit their highest level since 2007 after the Federal Reserve voted to hold its key interest rate steady, feeding fears that the central bank may not move fast enough to tame a rise in inflation.

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The yield – or interest rate – on the 30-year US Treasury bond rose 14 basis points to nearly 5.24%, a 19-year high, after the Fed announced its decision to hold its main rate at between 3.5% and 3.75% for the fifth meeting in a row.

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yield on the US 30-year bond benchmark has risen to its highest level since the global financial crisis, as shown in this chart covering the last 20 years.”,”caption”:”The yield on the US 30-year bond benchmark has risen to its highest level since the global financial crisis, as shown in this chart covering the last 20 years.”,”credit”:”Photograph: LSEG”}},{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Kevin Warsh, the Fed chair, said the bank would “not waver” in its commitment to tackling rising prices.

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A prolonged period of high inflation meant that some Americans believed the central bank had an “implicit target” above its 2% target, he added. He said:

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\n

There is no soft implicit target: not on this committee’s watch. There’s only a target and it’s 2%. This Fed will not waver … Our credibility rests on performing our duties and delivering on our responsibilities.

\n

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The decision to leave rates on hold spooked investors who are worried about the US economy’s ability to absorb a rise inflation triggered by Donald Trump’s war in Iran.

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You can read the full story here:

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That German GDP reading has indeed contributed to the wider eurozone hitting expectations – and then some.

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The eurozone economy grew by 0.4% in the second quarter of 2026, according to the preliminary reading from Eurostat – defying the gloom caused by the US-Israeli war on Iran.

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It was the fastest quarterly growth since the start of 2025, and also well above the 0.2% growth expected by economists.

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chart showing that Eurozone GDP expanded faster than expected in the second quarter of 2026.”,”caption”:”Eurozone GDP expanded faster than expected in the second quarter of 2026.”,”credit”:”Photograph: Eurostat”}}],”attributes”:{“pinned”:false,”keyEvent”:true,”summary”:false},”blockCreatedOn”:1785402577000,”blockCreatedOnDisplay”:”11.09 CEST”,”blockLastUpdated”:1785402920000,”blockLastUpdatedDisplay”:”11.15 CEST”,”blockFirstPublished”:1785402892000,”blockFirstPublishedDisplay”:”11.14 CEST”,”blockFirstPublishedDisplayNoTimezone”:”11.14″,”title”:”Eurozone GDP grew faster than expected in second quarter”,”contributors”:[],”primaryDateLine”:”Thu 30 Jul 2026 15.59 CEST”,”secondaryDateLine”:”First published on Thu 30 Jul 2026 08.46 CEST”},{“id”:”6a6b098c8f089924d071a90c”,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

The FTSE 100 is up 0.4%, but that is enough to push it to a record high of 10,978.87 points.

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That was slightly up on yesterday’s mark of 10,951.

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It appears that a few strong earnings reports – plus an oil price increase that helps the big oil players – have been enough to attract investors to the biggest British companies. But indices tracking smaller companies fell in early trading, amid global worries that the US Federal Reserve may not move fast enough to counter inflation.

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Analysts at Panmure Liberum, an investment bank, said:

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\n

UK and European markets are mixed this morning, with UK large-and mid-caps rising but small-cap and Aim declining. German and Italian indices are lower, whilst French and Spanish rise. This followed yesterday’s announcement that the Fed was leaving interest rates unchanged, with three hawkish dissents.

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customer filling up with petrol at a Shell filling station. Shell has benefited from higher oil prices during the Iran war.”,”caption”:”A customer filling up with petrol at a Shell fuel station. The company has benefited from higher oil prices during the Iran war.”,”credit”:”Photograph: Murdo MacLeod/The Guardian”}},{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Shell more than doubled its profit in its second quarter of the year, as Europe’s biggest oil and gas company reaped the benefits from the jump in oil and gas prices triggered by war in the Middle East.

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The FTSE 100 company’s net profit hit $9.84bn (£7.4bn) in the three months ended in June, more than double compared with the same period last year.

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The surge in profit comes as wholesale energy prices have soared because of the conflict in the Middle East, boosting profit margins and activity on Shell’s trading desks.

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The global oil price has climbed from about $61 a barrel in January to highs of $126 at the end of April, owing to disruptions to flows of oil and gas through the strait of Hormuz. Brent crude, the international benchmark, traded at $93.18 a barrel on Thursday.

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Wael Sawan, Shell’s chief executive, said there had been “severe disruption in global energy markets” due to the war, as the company also reported a 30% drop in production from its integrated gas division on the same quarter last year.

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You can read the full story here:

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Rolls-Royce is not the only weapons company to report strong demand today: BAE Systems has also said that “sustained increases” in defence budgets around the world meant it had upgraded its profit forecasts.

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BAE Systems’s sales rose 9% year-on-year during the first half of the year to £15.8bn, while it recorded orders worth £16.4bn, up £3.2bn from the same period last year.

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The company raised its profit outlook to an increase for the full year in the range of 10% to 12%, slightly higher than the range of 9% to 11% it had previously given.

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The manufacturer makes a large proportion of the UK’s weapons, ranging from tanks and fighter jets to munitions. But it has also benefited from demand in the US, which had raised weapons spending even before its war on Iran, and other export allies of the UK such as several countries in the Gulf.

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The two upgrades helped the FTSE 100 to rise on Thursday morning after initially dropping. Rolls-Royce shares gained 3.7%, while BAE Systems was up 1.1%.

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Charles Woodburn, BAE’s chief executive, said:

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Across the business, our outstanding teams have delivered another strong period of operational and financial performance, which gives us the confidence to upgrade our full year guidance.

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The global threat picture remains highly volatile and governments are responding with sustained increases in their defence budgets. The combination of our proven execution, diverse geographic footprint and continued investment in our technology and facilities, alongside our healthy order backlog and growing opportunities across our markets, positions us to keep delivering long-term growth.

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BAE said it had invested in factories in Texas and New Hampshire to support the US Government’s ambition to quadruple production of critical munitions. The company also unveiled a new autonomous fighter drone, called Brontanax, at the Farnborough air show last week. Woodburn said the “loyal wingman”, which would fly alongside a manned fighter jet, had “generated a lot of interest”.

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Rolls-Royce reported £2.5bn in underlying profits for the first half of 2026 and raised its forecasts for profits for the full year as it said its turnaround efforts had brought higher earnings in all its divisions.

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Underlying profit before tax for the first half of 2026 rose to £2.5bn, up 48% from the same period a year earlier. Statutory profits halved to £1.9bn, although those figures tend to be volatile because of the timing of payments. Revenues were up by £2bn year-on-year to £11.3bn.

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The FTSE 100 jet engine manufacturer has gone through an extraordinary period of growth under chief executive Tufan Erginbilgiç, who was brought in 2023 to turn the company around. Those efforts appear to have paid off so far, with investors welcoming soaring profits.

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The manufacturer on Thursday said it expects £4.7bn to £4.9bn in underlying operating profit, up from previous guidance of £4.0bn to £4.2bn. The free cashflow forecast is also up from between £3.6bn and £3.8bn to between £3.8bn and £4.0bn.

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The company has benefit from the recovery since the coronavirus pandemic lockdowns in long haul flights, many of which use Rolls-Royce engines. At the same time, defence spending has risen since Russia’s full-scale invasion of Ukraine in 2022, and its power generation unit has benefited from increased demand from datacentres used by AI companies.

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In its civil aerospace business the company has also spent heavily on fixes to passenger jet engines to keep them in the air for longer, reducing the number of aircraft on ground (AoG) at any time. It is also pressing ahead with producing small modular reactors to generate nuclear power in the UK, Czechia and Sweden.

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Erginbilgiç said:

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Our transformation continues to deliver, and we are demonstrating that Rolls-Royce is now a very different company to that of the past.

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We have made significant operational and strategic progress in the first half of the year. In civil aerospace, where we continued to improve our aftermarket profitability, we have also effectively eliminated aircraft on ground, providing a significant operational benefit to our customers. In defence, we continued to establish our leading position in autonomous propulsion with several key milestones achieved in the period.

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In power systems, we captured further profitable growth in datacentres, including growing prime power demand. Following its recent win in Sweden, Rolls‑Royce SMR has now been successful in every competitive European nuclear tender and is uniquely positioned to become a global market leader.

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Good morning, and welcome to our live coverage of business, economics and financial markets.

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London’s FTSE 100 is set to fall when it opens after the US Federal Reserve held interest rates steady despite the increasing expectations of inflation, while Donald Trump’s renewed attacks on Iran promised to add fuel to the price rise fire.

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Futures prices suggest the FTSE 100 will drop by about 0.6% when it opens. The UK’s blue chip index rose to a new record as high as 10,951 points on Wednesday morning, but fell back later in the day to 10,864.

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Analysts at Deutsche Bank led by Peter Sidorov said the market moves were triggered by last night’s “on-hold Fed decision combined with a relative lack of detail from Chair Warsh”.

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Kevin Warsh was appointed by Trump after courting the US president with an agenda to lower interest rates. That has put Warsh in a very tricky position as investors expect inflation to rise because of the US-Israeli attacks on Iran, which have caused oil prices to soar.

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Bond yields rose after the Fed meeting, suggesting investors doubt whether the Fed can control inflation. Sidorov and co wrote:

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This rise in yields ended up weighing on equities after some big intra-day swings. The S&P 500 went from trading more than half a percent down pre-FOMC to higher on the day during Warsh’s press conference but then saw a sharp drop in the final hour of trading to close -1.52% lower. Equities were also weighed down by another rout in chip stocks, with the Philly semiconductor index slumping by -5.33%.

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The declines on the FTSE 100 are likely to be moderated by some strong results on a busy day for UK corporate news: among the reporting companies were BAE Systems, Lloyds Banking Group, London Stock Exchange Group, and Shell.

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Jet engine manufacturer Rolls-Royce was also among the companies reporting. It raised its profit guidance yet again, continuing an extraordinary run in recent years. It expects between £4.7bn and £4.9bn in underlying operating profit and £3.8bn to £4.0bn in free cash flow for the full year.

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More details to come.

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The agenda

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9am BST: Germany GDP growth (second quarter; previous: 0.3% quarter-on-quarter; consensus: 0.1%)

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10am BST: Eurozone GDP growth (second quarter; prev: -0.2% quarter-on-quarter; cons: 0.2%)

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10am BST: Eurozone unemployment (June; prev: 6.2%; cons: 6.2%)

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12 noon BST: Bank of England interest rate decision (prev: 3.75%; cons: 3.75%)

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1pm BST: Germany inflation (July; prev: 2.3%; cons: 2.7%)

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1:30pm BST: US core personal consumption expenditure index (June; prev: 0.3%; cons: 0.2%)

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1:30pm BST: US GDP growth (second quarter; prev: 2.1%; cons: 2.1%)

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Key events

Closing summary: Chances of Bank of England September hike fall

The Bank of England held bank rate steady at 3.75% on Thursday, but three of its nine rate-setting members said it should have tightened monetary policy to combat inflation from the Iran war.

In other business and economics news today:

Thanks for reading today, and please do join me tomorrow for more business, economics and financial markets. JJ

US stock markets have bounced back on Thursday after a bumpy ride yesterday as investors fretted over whether the Federal Reserve was doing enough to tame inflation.

Those inflation fears appear to have been assuaged, at least in part, with the main American stock indices gaining in the first minutes of trading.

Here are the opening snaps:

S&P 500 UP 67.06 POINTS, OR 0.92%, AT 7,383.21
NASDAQ UP 375.43 POINTS, OR 1.54%, AT 24,818.38
DOW JONES UP 330.66 POINTS, OR 0.64%, AT 51,924.80

The football World Cup probably helped to prevent US GDP from slowing further. The event ran from 11 June to 19 July, bringing lots of tourists to the America (and Canada and Mexico), but the world’s biggest economy grew at an annualised rate of only 1.5%, compared with 2.1% the quarter before.

Dan Smith, an economist at the Centre for Economics and Business Research, said:

Growth was primarily driven by consumer spending growth, which accelerated in the second quarter, reflecting consumer resilience in the face of significantly elevated inflation and World Cup induced spending. However, this was offset by a downturn in government spending, easing investment growth and a growing trade deficit.

Looking ahead, CEBR expects US GDP to grow by 2.1% in 2026, demonstrating its resilience in the face of renewed hostilities in the Middle East.

The US GDP figures “seriously undersell a healthy American economy, said Bradley Saunders, North America economist at Capital Economics, a consultancy.

The 1.5% annualised rate was a significant slowdown during a period dominated by the US-Israeli war on Iran and the consequent rise in oil prices. It was well below the 2.1% growth expected by economists.

But Saunders said:

The slowdown in GDP growth to 1.5% annualised in the second quarter will not sway the Fed’s view that the economy is “expanding at solid pace”, given that final sales to private domestic purchasers rose by an impressive 3.9% annualised. With monthly spending data providing a solid handover to third-quarter consumption growth and signs that the investment boom is broadening, the second-quarter GDP figure seriously undersells a healthy economy.

The Bank of England’s Claire Lombardelli says its economists are monitoring the situation for consumers very closely. The Bank is not expecting a fall-off in consumer spending.

Bailey ends the press conference by thanking Bloomberg for lending them a venue while the Bank’s is being refurbished, as well as Nicola Heathman, a Bank employee since 1983 who retires today after years of liaising with journalists.

US GDP grows by 1.5% annualised, slower than expected

Breaking away from the Bank of England for a few seconds, US GDP growth has been reported at 1.5% annualised in the second quarter – below the 2.1% expected by economists.

Neil Birrell, chief investment officer of Premier Miton, an asset manager, said:

The US economy might not be in quite as good health as we thought it was, with, albeit slightly historic, GDP data falling short of expectations. But it’s unlikely to be improving today, with hostilities in Iran hanging heavily over the world. The Fed is worried about inflation, but we should also be worried about the growth trajectory.

The UK economy is an open economy relative to others, which means we have to spend more time considering the effect of the broader world, Bank of England governor Andrew Bailey says.

Back on inflation, the dissenting members think there will be second-round effects soon, but Bailey says his jury is out on whether the second-round effects will come through.

Asked again about the technicalities of quantitative easing, Andrew Bailey launches into a detailed discussion of how the Bank is governed, which we can probably skip…

Asked about the UK’s autumn budget, Bailey deflects the question, but adds that the Bank is not guiding about a future rate hike.

If you come out of the session talking about an insurance hike, I’m afraid you haven’t understood what we said, he says.

Asked about balancing keeping inflation down but not hitting the economy, Bank of England governor Andrew Bailey highlights that the Bank has some room to decide how quickly to return inflation to target without raising unemployment so far.

Asked about possible bank levies, Bailey says he has had no conversation about policy with John Healey yet because “frankly a week and a half is a short time” in economic policymaking, if not in politics.

Bank of England governor Andrew Bailey says the Bank is not “edging towards a hike” – just that the Bank has held rates steady this time.

Answering a question about policy transparency, he says the recent decision to give individual policymakers’ thoughts are helpful because they give an insight into the range of views of committee members.

Bank of England governor Andrew Bailey says he has exchanged views with the new chancellor – “quite a lot of chancellors now” – but he wouldn’t go so far as describing it as “advice”.

Asked about profit margins, Claire Lombardelli says inflation is another cost to businesses at a difficult time. It’s a challenging environment out there for businesses, she says.

Bailey adds that businesses will be examining their costs if they can’t raise prices.

Bank of England governor Andrew Bailey says that ultimately the interest rate is set to match the needs of the UK economy, and that they do not rely at what the Federal Reserve does or what the European Central Bank does to show them the path.

Asked about quantitative tightening (selling government bonds built up during previous asset purchase programmes), Dave Ramsden says that the programme has only had a small effect on UK bond yields.

The Bank of England’s ratesetters have differences in view on whether it is reasonable to wait and see what happens with the inflation outlook, Andrew Bailey says in response to the Guardian’s Phillip Inman.

Bailey says he is comfortable to wait and see. Three of his colleagues thought it was already time to act.

By far the biggest influence on the market in gilts (UK government debt) in recent months has been the situation in the Middle East, says Andrew Bailey.

Claire Lombardelli says the UK economy has been a bit more resilient than expected, but still relatively weak.

Bank of England governor Andrew Bailey is asked about food prices. He says so far the information suggests food inflation is lower than they had expected before.

Bailey says he was struck by the large proportion of energy costs in food costs four years ago, when inflation soared after Russia’s full-scale invasion of Ukraine.

The Bank is also watching the reporting on a possible El Niño weather system building, he adds, although he admits he is not a climate expert.

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Jiveglow

Bank of England holds interest rates despite Iran war inflation threat – as it happened

The agenda

Closing summary: Chances of Bank of England September hike fall

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