U.S. and U.K. Central Banks Likely to Hold Rates as Middle East Peace Deal Eases Inflation Risks

The Federal Reserve and the Bank of England are expected to keep their policy rates unchanged this week, citing the newly brokered peace agreement in the Middle East as a factor that could temper inflationary pressures.

The Fed is projected to maintain its benchmark rate within the 3.50%–3.75% band on Thursday, marking the first policy decision under new chair Kevin Warsh, a Trump appointee. Market participants will scrutinize Warsh’s remarks at the post‑decision press conference for clues about the Fed’s outlook on U.S. inflation and broader economic conditions. Inflation in the United States has risen from 2.4% in February to a three‑year high of 4.2% in May.

Earlier this week, President Trump announced a fresh agreement with Iran that could reopen the Strait of Hormuz. Prior to the deal, Warsh faced pressure to raise rates despite the president’s preference for a looser stance, as price growth accelerated. He is now expected to argue that restored oil flow will help ease inflation for the remainder of the year.

The Bank of England is also forecast to leave its key rate at 3.75%, even though UK inflation stands at 2.8%, above the 2% target. Analysts anticipate that most members of the nine‑person Monetary Policy Committee will adopt a “wait‑and‑see” approach during Thursday’s meeting, taking into account the immediate dip in oil prices triggered by the peace deal. Nevertheless, markets still price in a possible December rate hike.

ING economist James Smith cautioned that the durability of the agreement remains uncertain. “If the deal endures and oil supplies resume, UK inflation is likely to stay below 4%, allowing the Bank of England to avoid a summer rate increase,” he said.

Last week the European Central Bank raised its main refinancing rate from 2% to 2.25% after euro‑area consumer price inflation climbed to 3.2% in May from 3.0% in April. ECB President Christine Lagarde noted that higher energy costs are beginning to feed through to other sectors, warning of “second‑round effects” such as wage pressures that could compel further policy tightening.

Officials have expressed concern that the Middle‑East conflict has already spurred aggressive wage bargaining, prompting manufacturers and retailers to pass cost increases onto consumers through the summer and autumn. Like the Fed and the BoE, the ECB maintains a 2% inflation target.

Bank of England Governor Andrew Bailey recently observed that pressure on the Monetary Policy Committee to raise borrowing costs has eased, as commercial lenders have already lifted rates on loans and mortgages.

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