The Bank of England has held interest rates at 3.75% for the fourth consecutive meeting, but a deepening split on the Monetary Policy Committee saw two members vote for an increase to 4% – a sign that the battle against inflation is far from over.
Megan Greene joined chief economist Huw Pill in wanting a quarter-point rise, highlighting “the uncertainty over the impact on households and businesses of higher energy prices”. The vote was 7-2, a shift from the 8-1 split in April when only Pill dissented.
“Bank of England holds rates at 3.75% amid energy price worries, with two MPC members voting for a rise to 4%.”
Bank governor Andrew Bailey acknowledged the pressure but said holding was “the right position to be in”. He pointed to recent falls in oil prices as “encouraging”, yet warned that “the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline”. Price rises are still expected to accelerate in the UK as delayed wholesale energy costs feed into domestic gas and electricity bills.
The decision came just before the US-Iran peace deal was signed on Wednesday, a development that could reopen the Strait of Hormuz – a vital waterway carrying a fifth of the world’s oil and gas supplies. If oil flows freely again, concerns over a pick-up in inflation would ease. Bailey said he was “encouraged” by recent developments in the Middle East, though oil prices remain above pre-conflict levels and “continued to be volatile”.
Despite the hawkish tones, mortgage lenders have started cutting rates. Nationwide reduced its rates across the board by 0.8 percentage points, undercutting its own previous deals. It now offers a two-year fixed rate at 4.29% with a £1,499 fee for loans of £300,000 or more. Barclays followed with a two-year fix at 4.3% and a five-year fix at 4.43%. Halifax is still offering a two-year tracker at 3.96% with a 40% deposit.
Aaron Strutt, product director at Trinity Financial, said: “Nationwide has undercut itself with the latest rate reduction as it already topped many of the ‘best buy’ tables, suggesting lenders are taking drastic measures to boost activity in the property market.” David Hollingworth of L&C Mortgages added that “rates have been gradually easing back for a number of weeks” thanks to improving swap rates and lenders sharpening their competitive edge.
But the outlook remains uncertain. The average two-year fixed rate still stands at 5.59% and the five-year at 5.57%. Experts warn forecasts depend heavily on whether the Middle East conflict escalates. The MPC will meet again at the end of July, when the success and longevity of the peace deal should be clearer. For now, Bailey’s message is one of caution: “The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”