The Bank of England has held interest rates at 3.75% for the fourth consecutive meeting, as policymakers warned that high energy prices during the conflict in the Middle East still pose an inflationary threat — even after the signing of a US-Iran peace deal that could reopen a vital oil waterway.
Bank governor Andrew Bailey described recent falls in oil prices as “encouraging” but cautioned that four months of elevated energy costs meant there was “inflationary pressure in the pipeline”. The Monetary Policy Committee voted 7-2 to keep rates unchanged, with two members — chief economist Huw Pill and Megan Greene — pushing for an increase to 4%.
“Bank of England holds interest rates at 3.75% for fourth time, warning of inflationary pressure from Middle East conflict despite US-Iran peace deal.”
“The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target,” Bailey said, referring to the risk that higher energy prices feed through to the wider economy via price rises and wage demands.
The decision came just before the US-Iran peace deal was signed on Wednesday, an agreement that could lead to the reopening of the Strait of Hormuz. The waterway normally carries a fifth of the world’s oil and gas supplies. If oil flows freely again, concerns over a pick-up in inflation would be eased.
Speaking later, Bailey welcomed the deal. “Energy prices have come down quite a lot, but they’re still above where they were before this conflict started,” he said. “I think holding is the right position to be in at the moment.”
Despite the peace pact, the Bank noted that oil prices “continued to be volatile” and remained higher than before the conflict. Inflation expectations by the end of the year are now lower than the Bank had thought in April, but price rises are still expected to accelerate in the UK due to the delayed impact of higher wholesale energy prices on domestic gas and electricity bills.
The MPC will meet again at the end of July, by which time the success and longevity of the peace deal should be clearer. For now, Bailey said, holding rates was “a sensible decision in the light of the news”.