British shares edged lower on Thursday after the Bank of England opted to leave its policy rate at 3.75%, following a 6-3 split at the Monetary Policy Committee where three members preferred a 25 basis-point increase to 4%. The FTSE 100 finished the session down about 0.1%, while peers elsewhere in Europe showed gains, with Germany's DAX up around 0.5% and France's CAC 40 advancing roughly 0.9%. Sterling strengthened, rising 0.7% against the US dollar to $1.3464.
Governor Andrew Bailey emphasised that inflation has "fallen faster than we'd expected," but warned that the conflict in the Middle East continues to feed "high and volatile energy prices" that may push inflation higher later in the year. He and the committee framed the BOE's task as preventing any such rise from becoming persistent, aiming to return inflation to the 2% target over the medium term.
The bank reported that UK inflation has eased to 2.6%, a quicker decline than anticipated, but cautioned it is likely to climb again as rising energy costs work through to household bills and encourage businesses to adjust prices upward. The BOE noted that elevated mortgage rates and higher borrowing costs, together with a softer labour market, are restraining spending and wage pressures, which should limit the magnitude of any inflationary rebound.
In its statement the MPC observed that monetary policy cannot influence global energy prices, but it is monitoring developments closely and judged that the prevailing level of interest rates is "about the right level" to steer inflation back to the target over time. The committee set the next policy decision for September 17.
Markets were also processing developments in a rapidly escalating US-Iran confrontation. Egypt's prime minister's office attributed a Wednesday fire at the Damietta port to a drone strike, identifying the vessels involved as the US-owned Energos Winter storage ship and the Greek-owned GasLog Salem tanker, both of which were later moved offshore. No group has claimed responsibility for the incident.
Pakistan, acting as an intermediary between Washington and Tehran, said talks were "ongoing," with a focus on reopening the Strait of Hormuz and de-escalation, according to foreign ministry spokesman Tahir Andrabi. Iran's Revolutionary Guard reported that two oil tankers attempting to transit the Strait with what it described as US support turned back overnight after one caught fire, reiterating its stance that the strait is Iranian territory and will not be reopened while US "threats" remain. This account was a more specific statement than an earlier claim by the IRGC navy that three tankers had been "targeted and stopped."
Across the Atlantic, the Federal Reserve left its policy rate in a 3.50%-3.75% range. The decision included dissent from three regional presidents who favoured an immediate 25 basis-point increase, according to commentary reported by ING. Analysts James Knightley and Chris Turner described the Fed vote as among the closest in recent years. Chair Kevin Warsh was reported to have characterised the debate as a "good family fight," noting the committee ultimately chose policy stability by a large majority while warning it "will not hesitate to act" if inflation proves persistent.
ING said it continues to expect the Fed to keep rates steady into 2027 rather than follow through with a September hike that markets currently price in, citing softer jobs data, cooling shelter costs and tariff refunds that have eased pressure on corporate America. The broker also suggested that political considerations could prompt a push to secure an agreement with Iran to reopen the Strait of Hormuz ahead of the US midterm elections, which could relieve fuel costs for consumers.
Commodities and precious metals moved on the newsflow: Brent crude eased about 1.02% to $87.20 a barrel, while West Texas Intermediate fell roughly 1.11% to $83.52. Gold futures rose close to 0.97% to $4,075.40, and spot gold increased by about 0.29% to $4,078.12.
UK corporate headlines provided a mixed backdrop to the market. Lloyds Banking Group delivered first-half pretax profit that exceeded expectations and announced a new three-year strategic plan. The bank is targeting an approximately 20% return on tangible equity by 2030, aiming to reach this through retail banking expansion and cost savings driven by artificial intelligence.
Energy major Shell reported second-quarter adjusted earnings that more than doubled year-on-year and beat analyst forecasts. The company cited higher oil and gas prices, stronger performance in LNG and oil trading, and improved chemicals margins as key contributors, which offset lower volumes from Qatar.
Rolls-Royce raised its full-year profit guidance following a first-half operating profit increase of 46%. The company attributed the improvement to stronger civil aerospace aftermarket activity, increased defence demand and healthy orders tied to data-centre projects.
BAE Systems upgraded its 2026 outlook after first-half operating profit surpassed expectations, driven by robust defence spending that continues to sustain orders across its product lines.
Anglo American said it more than halved its first-half loss and increased its dividend as part of progress on a restructuring programme. The miner also noted that its proposed $53 billion merger with Teck Resources remains subject to final approval from China.
London Stock Exchange Group lifted the lower end of its revenue guidance and raised its margin outlook for 2026 after first-half results beat expectations. The firm said heightened market volatility boosted trading activity and supported growth in its markets business.
Overall, the BOE decision, combined with geopolitical uncertainty in the Middle East and company-specific earnings beats, left a market picture in which pockets of strength across banks, energy and defence were balanced by broader caution tied to inflation risks and energy price volatility.