The Bank of England has held interest rates at 3.75% for the fourth consecutive meeting, warning that high energy prices triggered by the conflict in the Middle East are still pushing up inflation. On Thursday, the Monetary Policy Committee voted 7-2 to leave the base rate unchanged, with chief economist Huw Pill and Megan Greene breaking ranks to call for an increase to 4%.
Bank governor Andrew Bailey acknowledged that recent drops in oil prices were “encouraging” but stressed that the “higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline.” He said the Bank’s job was to ensure that does not “turn into sustained inflation above our 2% target.”
“Bank of England holds interest rates at 3.75% for fourth time as Middle East conflict keeps energy prices high.”
The decision comes as the situation in the Middle East continues to be watched closely. Policymakers noted that oil prices remained higher than before the conflict and had “continued to be volatile.” However, they said inflation expectations by the end of the year were now lower than the Bank had thought in April.
Interest rate policy, they said, would depend on the “scale and duration” of the energy price shock and how much that filtered through to the wider economy via prices and wage demands. The MPC met just before the US-Iran peace deal was signed and will convene again at the end of July, when its success and longevity should be clearer.
The peace deal, signed on Wednesday, could lead to the reopening of the Strait of Hormuz, which normally carries a fifth of the world’s oil and gas supplies. Should oil start to flow freely again, concerns over a pick-up in inflation would be eased.
Speaking later, Bailey said he was “encouraged” by recent developments. “Energy prices have come down quite a lot, but they’re still above where they were before this conflict started. Inflation is higher than we expected it to be. I think holding is the right position to be in at the moment for that, so I think it’s a sensible decision in the light of the news.”
Price rises are still expected to accelerate in the UK, given the delayed impact of higher wholesale energy prices on domestic gas and electricity bills. The Bank last cut rates in December, but upheaval in the Middle East has stalled any further reductions.