The Bank of England held interest rates at 3.75 per cent today, even as other central banks begin raising rates following the inflation shock caused by the Iran war.

The Monetary Policy Committee voted by a majority of 7-2 in favour of keeping interest rates at their current level, holding firm in the face of other central banks' decision to hike rates to combat higher inflation. 

Two MPC members voted to increase Bank Rate by 0.25 percentage points, to 4 per cent. 

Last week, the European Central Bank became the first in the G7 to raise interest rates, after voting to hike by 0.25 percentage points to 2.25 per cent. The Bank of Japan also voted to increase its main interest rate to 1 per cent, from 0.75 per cent - a level not seen since 1995.

The Federal Reserve also held rates at its meeting on Wednesday, but indicated it would be prepared to hike later this year.  

The Middle East conflict pushed oil prices to as high as $126 a barrel, stoking fears that inflation could reach 5 per cent by summer. Central banks typically raise rates to bring down inflation and cut them once prices are back under control.

However, the Iran peace deal agreed this week has sent oil prices to below $80 a barrel and slashed the chances of possible rate hikes later this year. 

Andrew Bailey, Governor of the Bank of England, said: 'We’ve held Bank Rate at 3.75 per cent today. Oil prices have fallen in recent days, and that’s encouraging. But they’re 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. The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2 per cent target.' 

Fresh figures published on Wednesday showed inflation held steady at 2.8 per cent in May, defying expectations of an increase.

The Bank will also have kept a close eye on this morning’s job figures, which showed further signs of a cooling labour market. Unemployment dipped to 4.9 per cent, from 5 per cent, while wage growth in the private sector fell to 2.9 per cent - its lowest level in five years.

The BoE has previously said it needs average earnings growth to settle between 2 and 3 per cent to meet its inflation target.

Alongside the fragile agreement between the US and Iran, a weaker jobs market and slowing pay growth have increased the chances that the Bank of England will hold rates at their current level for longer.

Simon Dangoor, head of fixed income macro inevsting at Goldman Sachs Asset Management UK said: 'The BoE likely has room to assess the energy shock before taking decisive action. Recent dovish data is a reminder to the MPC that moving too soon could significantly dampen growth prospects. 

'The weak labour market and already-restrictive rates could keep the BoE on pause; however, hiking pressure will likely build if there are disruptions in the re-opening of the Strait.' 

Adopting a 'wait and see' approach is better news for millions of households and businesses concerned about a sharp increase in the cost of their mortgages and other loans this summer.

Earlier this week, Nationwide became the first lender to slash mortgage rates amid hopes that the Bank will cut rates later this year.

Martin Beck, chief economist at WPI Strategy said: 'The most plausible outlook remains one in which rates are held at current levels until late in the year. At that point, assuming the US-Iran peace deal holds and geopolitical tensions continue to ease, the BoE should be in a position to resume cutting.’

He added: 'That means the UK economy should at least avoid the additional headwind of higher interest rates - unlike the eurozone, following last week’s ECB hike. This should reduce obstacles to consumers saving less rather than simply spending less in response to higher prices, a factor which probably supported the economy’s better-than-expected performance in the first part of this year and points to economic growth in 2026 being a bit stronger than the consensus expects.' 

This is a developing story