By Paul Hannon

The Bank of England is expected to leave its key interest rate unchanged Thursday, a decision that would likely see it mirroring the Federal Reserve but mark a parting of ways with the European Central Bank.

However, the U.K.'s central bank is expected to signal that it stands ready to increase borrowing costs if the conflict in the Middle East is not resolved soon, and there are signs that wage increases are set to pick up.

"We think those advocating for a hold will signal that they remain open to tightening policy later this year," said Edward Allenby, an economist at Oxford Economics.

Iran and the U.S. on Sunday said they have agreed on an interim peace deal. However, many details are yet to be settled, and it is unclear exactly when the Strait of Hormuz will reopen and energy supplies from the Persian Gulf will return to prewar levels.

The ECB on Thursday raised its key rate for the first time in more than three years, citing a pickup in inflation as the Middle East conflict keeps energy prices high.

However, most BOE policymakers see clearer signs of economic weakness than their counterparts at the ECB.

Figures released Friday showed the U.K. economy contracted in April, after starting the year strongly. Official figures record a contraction in the eurozone economy in the first quarter. But ECB President Christine Lagarde on Thursday attributed that to a "temporary" setback in Ireland and added that growth is not under "significant threat."

The decision to hold rates is unlikely to be unanimous, and BOE Chief Economist Huw Pill is expected to have company in voting for a rise in the key rate to 4% from 3.75%. A number of economists expect the bank's Megan Greene to join him, and other dissents are possible.

But for now, a majority of the MPC's nine members sees only a moderate risk that the rise in energy prices since the Iran war began will lead to a pickup in wages that prompts businesses to raise their prices in order to preserve profit margins.

They see a jobs market that has weakened significantly over recent months, making workers more wary of pressing hard for pay increases. With consumer demand remaining weak, they also doubt that businesses will risk losing customers by raising their prices rapidly.

Indeed, a survey conducted by the BOE in April found that most U.K. businesses expected to see their profit margins shrink as a result of the war, an indication that they don't believe they have much pricing power.

"We doubt businesses will be able to make a series of price hikes stick or be able to afford to raise wage growth," said Ruth Gregory, an economist at Capital Economics.

As the war began, the BOE's key rate was at a level that policymakers judged was restraining activity and cooling inflation. They were expecting to lower it by half a percentage point this year.

By contrast, the ECB's key rate was at a level that neither restrained nor encouraged growth, and policymakers appeared content to leave it there.

A number of BOE policymakers have argued in recent speeches that removing the prospect of cuts has tightened policy, a restraint on activity that has been reinforced by a sharp rise in government bond yields that has in turn made borrowing more expensive for households and businesses.

There is little immediate desire to add to that tightness in the absence of clear signs of second-round effects. Should the conflict be resolved soon, a rate rise this year seems less likely. If the strait remains largely closed to shipping, an increase in borrowing costs is possible.

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

(END) Dow Jones Newswires

June 15, 2026 02:27 ET (06:27 GMT)

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