Lead

Central banks in the US and UK are expected to leave interest rates on hold this week, as a peace deal in the Middle East is expected to ease inflationary pressures. The US Federal Reserve is expected to hold its benchmark interest rate at a range of 3.5% to 3.75% in what will be the first policy decision under new Fed chair Kevin Warsh, President Donald Trump's pick.

The Bank of England is also expected to hold rates at 3.75%, despite UK inflation running at 2.8%, above its 2% target. The decisions come as the European Central Bank (ECB) raised rates last week, and as fresh UK jobs data showed unemployment falling and wage growth strengthening.

Coverage Comparison

The Guardian's reporting frames the central bank decisions against the backdrop of the Iran peace deal and its impact on inflation. One report notes that the peace deal is expected to ease inflationary pressures, contributing to expectations that both the Fed and the Bank of England will hold rates. Another report focuses on the unemployment and wage figures, suggesting they put pressure on the Bank of England to raise rates despite the deal.

A third report confirms the Bank of England's decision to hold rates at 3.75%, describing it as widely expected, and highlights the difficult balancing act facing policymakers as higher energy costs from the closure of the Strait of Hormuz are expected to boost inflation and slow UK economic growth.

The reports all attribute the economic outlook to the Middle East situation, with the peace deal raising hopes that oil supplies could soon flow again, potentially easing cost pressures.

Key Claims

  • Unemployment fell to 4.9% in the three months to April, according to the Office for National Statistics (ONS), down from 5% in the three months to March.
  • Average wages excluding bonuses remained at 3.4%, but climbed to 4.4% once bonuses were included, the ONS said.
  • Annual average regular earnings growth was 4.8% for the public sector and 3% for the private sector.
  • Vacancies slumped to their lowest level in more than five years, falling by 19,000 to 707,000 in the three months to May.
  • The US Federal Reserve is expected to hold its benchmark interest rate at a range of 3.5% to 3.75%, according to a report.
  • The European Central Bank raised interest rates from 2% to 2.25% last week.
  • The Bank of England has left interest rates on hold at 3.75%.
  • Higher energy costs as a result of the closure of the Strait of Hormuz are expected to boost inflation and slow UK economic growth.
The Bank of England governor, Andrew Bailey, has cited strong public sector pay as a concern for its monetary policy committee. The work and pensions secretary, Pat McFadden, commented on the figures, saying there are 400,000 more people in work than this time last year, but acknowledged ongoing instability in the Middle East is causing uncertainty.

Analysts quoted in the reports suggest most of the Bank's nine-member monetary policy committee will adopt a "wait-and-see" approach before reacting to the deal, which triggered an immediate drop in oil prices. Financial markets are still pricing in one more UK rate rise this year, in December.

James Smith, an economist at ING, said it was uncertain how long a peace deal would hold, but added that if the deal endures and oil starts flowing again, UK inflation would likely stay below 4% and enable the Bank of England to avoid a rate hike this summer.

The ECB president, Christine Lagarde, said on Monday that higher energy prices were starting to feed through to other parts of the economy, noting indirect effects of inflation.

The Bank of England had cut rates six times since mid-2024 and was expected to continue doing so before the Iran conflict led to oil supplies from the Gulf being choked off. Weaker-than-expected inflation raised hopes that the effect of the conflict on economy-wide inflation might be less severe than feared, though the latest jobs snapshot may have raised some concerns among policymakers as wage growth was stronger than expected.