Bank of England holds interest rates despite Iran war inflation threat – business live

The Bank of England held bank rate steady at 3.75% on Thursday, but three of its nine rate-setting members said it should have tightened monetary policy to combat inflation from the Iran war.

Yet despite what some economists described as a “hawkish holdâ€, market-implied probabilities suggest the chances of a rate hike at the next meeting in September have gone down. The implied probability of no change in September rose from 53.6% just before the meeting to 73% by mid-afternoon.

Governor Andrew Bailey repeatedly told reporters at a press conference in London that the Bank was not preparing investors for a rate hike in the future, and that he was fairly comfortable that there was little evidence of inflationary pressures from oil prices feeding through to other goods and services in the economy.

The conflict started by the US and Israel hangs over every economic question at the moment. Iran shut the strait of Hormuz in response to the bombing campaign, shutting in millions of barrels a day of oil production. Central bankers are trying to wrestle with what that means for inflation across the world.

Catherine Mann, one of the independent members of the Bank of England's monetary policy committee, joined her colleagues, Huw Pill and Megan Greene, in voting for a rate hike today. Mann said the collapse of a temporary truce between the US and Iran probably meant higher prices were unavoidable, so higher rates were needed to counter that.

Bailey characterised the disagreement as a reasonable divergence of judgments, but said the majority on the committee thought that evidence of second-order effects was lacking – even if inflation will rise later in the year because of higher oil prices.

In other business and economics news today:

• US GDP grew by 1.5% annualised, slower than expected

• US borrowing costs rose to their highest since the global financial crisis

• Lloyds Banking Group will cut another £2bn of costs as part of a four-year plan under which its chief executive will use new tech and AI to drive growth.

• Eurozone GDP grew faster than expected in the second quarter despite concerns over the Iran war.

• London's FTSE 100 rose to a new high as mining companies and Rolls-Royce gained ground.

• Shell doubled its profits in the second quarter thanks to the Iran war oil price jump

• BAE Systems and Rolls-Royce upgraded profits as defence spending surges

• Airbus was fined £6.4m in the UK after the European aerospace company admitted to breaches of rules designed to stop sensitive goods such as military hardware falling into the wrong hands.

• Laptops, mobile phones and documents have been seized after officials carried out search warrants in a crackdown on claims companies plaguing people with spam text messages about the car finance mis-selling scandal.

Thanks for reading today, and please do join me tomorrow for more business, economics and financial markets. JJ

US stock markets have bounced back on Thursday after a bumpy ride yesterday as investors fretted over whether the Federal Reserve was doing enough to tame inflation.

Those inflation fears appear to have been assuaged, at least in part, with the main American stock indices gaining in the first minutes of trading.

Here are the opening snaps:

• S&P 500 UP 67.06 POINTS, OR 0.92%, AT 7,383.21

• NASDAQ UP 375.43 POINTS, OR 1.54%, AT 24,818.38

• DOW JONES UP 330.66 POINTS, OR 0.64%, AT 51,924.80

The football World Cup probably helped to prevent US GDP from slowing further. The event ran from 11 June to 19 July, bringing lots of tourists to the America (and Canada and Mexico), but the world's biggest economy grew at an annualised rate of only 1.5%, compared with 2.1% the quarter before.

Dan Smith, an economist at the Centre for Economics and Business Research, said:

Growth was primarily driven by consumer spending growth, which accelerated in the second quarter, reflecting consumer resilience in the face of significantly elevated inflation and World Cup induced spending. However, this was offset by a downturn in government spending, easing investment growth and a growing trade deficit.

Looking ahead, CEBR expects US GDP to grow by 2.1% in 2026, demonstrating its resilience in the face of renewed hostilities in the Middle East.

The US GDP figures “seriously undersell a healthy American economy, said Bradley Saunders, North America economist at Capital Economics, a consultancy.

The 1.5% annualised rate was a significant slowdown during a period dominated by the US-Israeli war on Iran and the consequent rise in oil prices. It was well below the 2.1% growth expected by economists.

But Saunders said:

The slowdown in GDP growth to 1.5% annualised in the second quarter will not sway the Fed's view that the economy is “expanding at solid paceâ€, given that final sales to private domestic purchasers rose by an impressive 3.9% annualised. With monthly spending data providing a solid handover to third-quarter consumption growth and signs that the investment boom is broadening, the second-quarter GDP figure seriously undersells a healthy economy.

The Bank of England's Claire Lombardelli says its economists are monitoring the situation for consumers very closely. The Bank is not expecting a fall-off in consumer spending.

Bailey ends the press conference by thanking Bloomberg for lending them a venue while the Bank's is being refurbished, as well as Nicola Heathman, a Bank employee since 1983 who retires today after years of liaising with journalists.

Breaking away from the Bank of England for a few seconds, US GDP growth has been reported at 1.5% annualised in the second quarter – below the 2.1% expected by economists.

Neil Birrell, chief investment officer of Premier Miton, an asset manager, said:

The US economy might not be in quite as good health as we thought it was, with, albeit slightly historic, GDP data falling short of expectations. But it's unlikely to be improving today, with hostilities in Iran hanging heavily over the world. The Fed is worried about inflation, but we should also be worried about the growth trajectory.

The UK economy is an open economy relative to others, which means we have to spend more time considering the effect of the broader world, Bank of England governor Andrew Bailey says.

Back on inflation, the dissenting members think there will be second-round effects soon, but Bailey says his jury is out on whether the second-round effects will come through.

Asked again about the technicalities of quantitative easing, Andrew Bailey launches into a detailed discussion of how the Bank is governed, which we can probably skip…

Asked about the UK's autumn budget, Bailey deflects the question, but adds that the Bank is not guiding about a future rate hike.

If you come out of the session talking about an insurance hike, I'm afraid you haven't understood what we said, he says.

Asked about balancing keeping inflation down but not hitting the economy, Bank of England governor Andrew Bailey highlights that the Bank has some room to decide how quickly to return inflation to target without raising unemployment so far.

Asked about possible bank levies, Bailey says he has had no conversation about policy with John Healey yet because “frankly a week and a half is a short time†in economic policymaking, if not in politics.

Bank of England governor Andrew Bailey says the Bank is not “edging towards a hike†– just that the Bank has held rates steady this time.

Answering a question about policy transparency, he says the recent decision to give individual policymakers' thoughts are helpful because they give an insight into the range of views of committee members.

Bank of England governor Andrew Bailey says he has exchanged views with the new chancellor – “quite a lot of chancellors now†– but he wouldn't go so far as describing it as “adviceâ€.

Asked about profit margins, Claire Lombardelli says inflation is another cost to businesses at a difficult time. It's a challenging environment out there for businesses, she says.

Bailey adds that businesses will be examining their costs if they can't raise prices.

Bank of England governor Andrew Bailey says that ultimately the interest rate is set to match the needs of the UK economy, and that they do not rely at what the Federal Reserve does or what the European Central Bank does to show them the path.

Asked about quantitative tightening (selling government bonds built up during previous asset purchase programmes), Dave Ramsden says that the programme has only had a small effect on UK bond yields.

The Bank of England's ratesetters have differences in view on whether it is reasonable to wait and see what happens with the inflation outlook, Andrew Bailey says in response to the Guardian's Phillip Inman.

Bailey says he is comfortable to wait and see. Three of his colleagues thought it was already time to act.

By far the biggest influence on the market in gilts (UK government debt) in recent months has been the situation in the Middle East, says Andrew Bailey.

Claire Lombardelli says the UK economy has been a bit more resilient than expected, but still relatively weak.

Bank of England governor Andrew Bailey is asked about food prices. He says so far the information suggests food inflation is lower than they had expected before.

Bailey says he was struck by the large proportion of energy costs in food costs four years ago, when inflation soared after Russia's full-scale invasion of Ukraine.

The Bank is also watching the reporting on a possible El Niño weather system building, he adds, although he admits he is not a climate expert.