The Bank of England has indicated that the ongoing conflict in the Gulf will continue to exert upward pressure on inflation, even if hostilities with Iran subside. During its latest meeting, the Monetary Policy Committee maintained the benchmark interest rate at 3.75%, but cautioned that inflation is expected to increase due to heightened energy costs linked to the crisis.
Bank Governor Andrew Bailey noted that although oil prices have recently declined, they remain elevated compared to levels prior to the outbreak of conflict. He emphasized that the sustained higher energy prices over the past several months have already embedded inflationary pressures in the economy.
In parallel developments, U.S. President Donald Trump announced he had reached an agreement with Iran ensuring free passage through the strategic Strait of Hormuz shipping route for a 60-day period, aiming to alleviate tensions impacting global oil supply.
The Bank’s Monetary Policy Committee projected that Consumer Prices Index (CPI) inflation will hover just under 3% over the next three months before rising slightly above 3.25% towards the end of 2026.
On the labour market front, recent statistics presented a mixed picture amid regional instability. Unemployment rates have shown a decline, yet the number of people classified as economically inactive increased by nearly 69,000 in the past month, reaching over 20.4 million. This category includes pensioners and others outside the workforce.
Work and Pensions Secretary Pat McFadden linked the uncertain geopolitical climate to labour market fluctuations. He highlighted a net gain of 400,000 employed individuals compared to the previous year but acknowledged that instability in the Middle East continues to impact economic confidence.
Within the working-age population (16 to 64 years), the economically inactive group grew by 33,000 to 9.136 million. Shadow Business Secretary Andrew Griffith criticized the figures, arguing they mask a broader trend of workers exiting the labour force and becoming reliant on benefits.
Further concerns stem from a significant decline in job vacancies, which have fallen to their lowest point in over five years. The Office for National Statistics cited economic uncertainty and rising labour costs as key factors prompting employers to pause recruitment efforts. Contributing to increased costs are the government’s rise in National Insurance contributions for employees implemented last April, along with above-inflation increases to the minimum wage.
Despite these pressures, wage growth remained steady at 3.4% in the three months leading up to April, indicating little change in earning trends amid the challenging economic environment.