The calm before the storm—summer could bring peak inflation
In the shadow of geopolitical upheaval, the Bank of England prepares to hold its ground — keeping interest rates at 3.75 percent for a fourth consecutive meeting as policymakers weigh the fragile promise of a Middle East peace deal against the stubborn persistence of above-target inflation. The potential reopening of the Strait of Hormuz has softened the most alarming forecasts, yet the calm feels provisional, with summer's energy price adjustments still waiting on the horizon. Central banks, like sailors reading uncertain skies, are choosing patience over action — a wager that the world's oil will flow freely enough to spare ordinary households from the storm some still expect.
- Months of conflict around the Strait of Hormuz sent energy prices surging and forced central banks across Europe to contemplate raising borrowing costs to contain the damage.
- A surprise US-Iran peace deal last week shifted the calculus sharply, sending oil prices tumbling and reducing the likelihood of the severe inflation shock policymakers had feared.
- UK inflation remains above target, and mortgage rates have climbed steeply since March — the average two-year fixed deal now at 5.60 percent, up nearly a full point in three months.
- The Bank of England is expected to hold rates Thursday, but analysts warn that July's Ofgem energy price cap adjustment could reignite inflation and force the Bank's hand before year-end.
- While the European Central Bank raised rates last week for the first time in nearly three years, the Bank of England is betting on restraint — watching, waiting, and hoping the peace holds.
The Bank of England is expected to leave interest rates unchanged at 3.75 percent when its Monetary Policy Committee announces its decision Thursday at noon — the fourth consecutive meeting without a move. The world, however, has not stood still since rates last fell in December.
For months, the conflict involving the US, Israel, and Iran cast a long shadow over inflation forecasts. Energy prices climbed, shipping routes grew uncertain, and the Bank's own policymakers signaled in April that they might need to raise rates to combat what they called a significant energy price shock. Then last week, President Trump announced a peace deal with Iran, raising the prospect of the Strait of Hormuz — a waterway carrying roughly a fifth of the world's oil and gas — reopening to normal traffic. Oil prices fell sharply in response, and the worst-case inflation scenario suddenly looked less certain.
The picture remains delicate. UK inflation came in lower than expected for May, with transport costs rising fastest while food price pressures eased somewhat. But analysts caution that this is likely a temporary reprieve. When Ofgem adjusts its household energy price cap in July, inflation is expected to accelerate again — what one investment analyst called "the calm before the storm."
The human stakes are already visible in mortgage markets. The average two-year fixed deal has risen to 5.60 percent from 4.83 percent just three months ago, a direct consequence of the uncertainty that followed the conflict's outbreak in March. Some analysts believe the Bank will avoid raising rates for the rest of the year if the peace deal holds; others remain cautious. The European Central Bank, by contrast, raised its own rates last week for the first time in nearly three years. The Bank of England, for now, is choosing to wait — each decision to hold a quiet wager that stability, not crisis, will define the months ahead.
The Bank of England is expected to leave interest rates where they have sat for the past four meetings: at 3.75 percent. The decision comes Thursday at noon, and analysts across the financial sector are nearly unanimous in their prediction that the Monetary Policy Committee will not move. What has changed since December, when rates last fell, is the world itself—or at least the part of it that pumps oil through the Strait of Hormuz.
For months, the conflict between the US and Israel on one side and Iran on the other has cast a shadow over inflation forecasts. Energy prices spiked. Shipping routes grew uncertain. Central banks across Europe and beyond began to worry that the disruption would push prices higher across their economies, forcing them to raise borrowing costs to keep inflation in check. The Bank of England's own policymakers signaled in April that they might need to do exactly that—raise rates—to combat what they called a "significant energy price shock" from the war.
But last week, something shifted. President Trump announced a peace deal with Iran, and with it came the prospect of the Strait of Hormuz reopening to normal traffic. That waterway carries roughly a fifth of the world's oil and gas. When traders heard the news, oil prices fell sharply, dropping close to their lowest point since the conflict began. The worst-case scenario for energy inflation—the one that had kept policymakers awake—suddenly looked less likely.
Yet the picture remains complicated. UK inflation, while not as severe as some had feared, still sits above the Bank of England's target. Over the year to May, transport costs rose fastest, though price increases in meat, dairy, and vegetables actually eased. The overall figure came in lower than expected, which has reinforced the case for holding rates steady rather than raising them. But analysts caution that this calm may not last. Come July, when the energy regulator Ofgem adjusts its price cap on household gas and electricity, inflation is expected to accelerate again. Victoria Scholar, head of investment at Interactive Investor, described the current moment as "the calm before the storm," warning that summer could bring peak inflation to Britain.
The stakes are real for ordinary households. Mortgage rates have already climbed sharply since the Iran war began in March. The average two-year fixed mortgage deal now sits at 5.60 percent, up from 4.83 percent three months ago. Five-year deals have risen to 5.57 percent from 4.95 percent. These are the rates that matter to people with homes to finance, and they move in lockstep with the Bank of England's decisions.
Some analysts believe the Bank may not raise rates at all for the rest of the year, betting that the Iran peace deal will prove durable and energy prices will stabilize. Others remain cautious, noting that geopolitical situations can shift without warning. The European Central Bank, meanwhile, took a different path last week, raising its own rates for the first time in nearly three years, citing inflation pressures from the conflict. The Bank of England, for now, is choosing to wait and watch. Thursday's decision to hold will likely be the first of several such announcements, each one a small bet that the world's oil will flow freely again and that British households will not face the worst inflation scenario policymakers feared just weeks ago.
Notable Quotes
UK inflation is expected to increase over the summer after the next Ofgem price cap in July, when we will likely arrive at peak inflation— Victoria Scholar, head of investment, Interactive Investor
The Hearth Conversation Another angle on the story
Why does the Bank of England care so much about what's happening in Iran right now?
Because Iran sits on one of the world's most critical chokepoints for energy. When that region destabilizes, oil prices spike, and when oil prices spike, everything gets more expensive—fuel, heating, transport, food. That feeds into inflation, which is the Bank's job to control.
So the peace deal is good news for them?
It's potentially good news, yes. If the Strait of Hormuz reopens and oil flows normally again, energy prices should stabilize or fall. That takes pressure off inflation, which means the Bank doesn't have to raise rates as aggressively.
But you said inflation is still above target. Why not raise rates anyway?
Because they're watching to see if the peace holds. If they raise rates now and then oil prices fall further, they've made borrowing more expensive for no reason. They're in a wait-and-see position.
What happens in July that changes things?
The energy price cap gets adjusted. Households will likely see their gas and electricity bills go up, which will push inflation higher through the summer. That's when the real test comes—whether the peace deal actually sticks and keeps energy prices down, or whether other pressures take over.
So mortgage rates could go up?
They could. They've already gone up three-quarters of a point since March just from market expectations. If the Bank does eventually raise rates, mortgages will follow. People with variable-rate mortgages are already feeling it.
Is the Bank of England being cautious or just uncertain?
Both. They're cautious because geopolitical situations can reverse overnight. But they're also genuinely uncertain about how this plays out. The European Central Bank raised rates anyway, betting that inflation pressures are real. The Bank of England is betting they can wait a bit longer.