Economic update: Proceeding with caution
The Bank of England has held UK interest rates at 3.75% for the fourth month in a row following continued concerns about inflation.
- In June 2026, the Bank of England’s Monetary Policy Committee held interest rates at 3.75% for the fourth month in a row in response to continuing uncertainty around energy prices and the accompanying risk of inflation.
- High energy prices remain a concern for industry. The government is hoping to address this with the British Industrial Competitiveness Scheme, although it is not due to start until April 2027.
- The labour market weakened further, with job vacancies falling to their lowest level in five years and the number of young people not in education, employment or training (NEET) exceeding 1 million for the first time in 13 years.
The Bank of England’s Monetary Policy Committee (MPC) has held UK interest rates at 3.75% for the fourth meeting in a row (as shown in the chart below).
In its June 2026 Monetary Policy Summary, the Bank said the decision reflected continued uncertainty around inflation and the wider economic outlook.
The Governor of the Bank of England, Andrew Bailey, said he was “very encouraged” by the recent US–Iran talks but added that holding rates was “a sensible decision”.
The decision to hold rates was not unanimous. Two members of the MPC voted to raise rates to 4%, but they were outvoted by the other seven members of the MPC.
Consumer Prices Index (CPI) inflation was 2.8% in May 2026, above the MPC’s target of 2%. Prior to the conflict in the Middle East, the Bank expected that inflation would fall to around 2% from April 2026, and stay close to 2% for the rest of 2026.
In its June summary, the MPC said that based on energy market pricing as of 15 June, CPI inflation was expected to be “a little under 3% in 2026 Q3” (third quarter) and “a little over 3¼% in Q4”, lower than it expected in its April forecasts.
However, the outlook for inflation remains uncertain. Energy prices have fallen sharply in recent days following news about the signing of a memorandum of understanding between the US and Iran to end the conflict. Despite this, energy prices remain higher than before the conflict began, and it is still unclear whether the talks will succeed or lead to a more stable outlook.
If energy prices remain elevated, the effects could feed through to the wider economy. Businesses facing higher bills may raise their own prices, while workers may ask for higher wages to cover increased living costs.
High energy costs remain a concern for industryHigh energy costs remain a significant concern for UK industry, affecting firms’ costs, competitiveness and investment decisions. Recent uncertainty in global energy markets has drawn renewed attention to these pressures.
Manufacturing is one example, as many firms in the sector are particularly exposed to high energy costs. Make UK, which represents UK manufacturers, said in a report published in June that high energy prices were affecting investment decisions and adding to cost pressures.
Make UK’s survey found that 9% of manufacturers had already moved production overseas because of higher business costs, while a further 16% were considering doing so.
These concerns have been heightened by wider uncertainty around energy prices following the conflict in Iran. Almost half of firms said their energy bills had risen further since the start of the conflict and 1 in 10 said it was likely or very likely that they would become insolvent.
A report on UK energy security published by PwC in June 2026 also highlighted the impact of high energy costs on UK industry.
The report said that persistently high industrial electricity prices (see the chart below) were undermining competitiveness and constraining growth across the economy. PwC estimated that Britain could miss out on £250 billion in economic value over the next decade (equivalent to 8% of current GDP) without action to reduce the country’s high energy costs.
The government has recognised that high energy costs are a challenge for UK industry. Data published by Department for Energy Security and Net Zero (DESNZ) shows that UK industrial electricity prices are higher than the G7 average. This can make it harder for some firms to compete internationally, particularly in energy-intensive sectors.
To address high energy costs, the government announced the British Industrial Competitiveness Scheme as part of its Industrial Strategy. The scheme is intended to reduce electricity bills for over 10,000 businesses by up to 25%.
However, the scheme is not due to start until April 2027, so it will not provide immediate relief to industry. Make UK has called for the British Industrial Competitiveness Scheme to be brought forward and expanded to cover more of the manufacturing sector.
Young people face a more difficult transition into workThe pressure on firms comes alongside signs of caution in the wider labour market, particularly for young people trying to move into work.
The latest ONS data shows that the number of young people not in education, employment or training (NEET) exceeded 1 million for the first time since 2013. In January to March 2026, 1.01 million people aged 16 to 24 were NEET, equivalent to 13.5% of this age group.
The figures were published on the same day as the interim report of Alan Milburn’s independent review of young people and work, which was published by the Department for Work and Pensions on 28 May.
The review is examining why the number of young people who are NEET has risen. A final report is expected in summer 2026.
The interim report suggests that many young people are becoming detached from education and work. It points to fewer entry-level opportunities, weaker work-based routes such as apprenticeships, uneven access to careers advice and rising health barriers as factors making the transition into work harder.
You can read more about the report and other NEET statistics in the Commons Library briefing, NEET: Young People Not in Education, Employment or Training.
Falling vacanciesThe latest labour market statistics from the ONS also showed falls in vacancies in sectors where young people are often employed, such as retail and hospitality. These sectors recorded significant drops in vacancies compared with both March to May 2025 and the previous quarter, December 2025 to February 2026.
Professional services recorded the largest quarterly fall in vacancies in March to May 2026.
Overall, the number of job vacancies fell by 19,000 to 707,000 in March to May 2026, compared with December 2025 to February 2026. This was the lowest level since February to April 2021 (as shown in the chart below).