By Paul Newfield
At the latest UK interest rate decision, the Bank of England voted 8–1 to keep Bank Rate unchanged at 3.75% in April 2026, with one member preferring an increase to 4% and several policymakers indicating they could consider additional rate increases in the future. Policymakers highlighted that the conflict in the Middle East has created significant uncertainty for global energy prices. While monetary policy cannot directly influence them, the Committee aims to ensure any inflationary impact feeds through in a way consistent with the 2% target over the medium term, with outcomes dependent on the scale and duration of the shock and how it spreads through the economy.
CPI inflation has risen to 3.3% and is expected to move higher later in the year as energy costs pass through, raising the risk of second round effects in wages and pricing. However, a loosening labour market and weaker growth may help contain inflation pressures, while tighter financial conditions since the conflict began are also expected to dampen demand. It is predicted, however, that unemployment will increase over the coming months, particularly in the under-25s – interest rates are still expected to be 3% or more in 2028.
Switching to the EU and a number of ECB members viewed the April decision to keep rates unchanged as a close call and indicated they would have supported a rate hike had it been proposed, according to the latest ECB meeting minutes. Policymakers warned that the energy-driven supply shock was proving more persistent than previously expected, increasing the risk of broader and more entrenched inflationary pressures, while the war in the Middle East was seen as a key source of uncertainty for both inflation and growth.
Members also acknowledged the increasingly difficult trade-off facing monetary policy, as slowing economic activity and weakening confidence coincided with rising inflation risks. Several officials noted that even with two projected rate hikes this year, inflation was still expected to remain slightly above the ECB’s target. Investors expect the ECB to raise its key rates by 25 basis points on June 11, with at least one additional hike priced in by the end of the year – this could weaken that GBP-EUR rate which is all important for those of you with sterling in hand wanting to buy a holiday home in Europe.
In the US, a majority of Fed officials highlighted that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%, minutes from the FOMC meeting in April 2026 showed. To address the possibility of rate hikes, “many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions“. However, several participants highlighted that it would likely be appropriate to lower interest rates once there are clear indications that disinflation is firmly back on track or if solid signs emerge of greater weakness in the labour market.
The Fed kept the fed funds rate unchanged at the 3.5%–3.75% target range for a third consecutive meeting in April. The decision was not unanimous, and the 8-4 vote marked the first time since October 1992 that four officials dissented against a FOMC decision.
The past week has seen rates flat with barely a quarter-cent movement on GBP-EUR and only a half-cent change in GBP-USD.
It is almost as if the markets are waiting for something big to happen – don’t get caught in the trap of waiting due to perceived stability. With US inflation, UK GDP and EU interest rate decisions next week, that could send rates lower. Get in touch with us now.