The Bank of England has held interest rates at 3.75% for the fourth consecutive meeting, but the vote to do so has narrowed sharply – a sign that the pressure to raise borrowing costs is intensifying as high energy prices fuel inflation.
The Monetary Policy Committee voted 7-2 to keep the base rate unchanged, with two members – chief economist Huw Pill and Megan Greene – pushing for an increase to 4%. Greene cited uncertainty over the impact of higher energy prices on households and businesses. In April, only Pill had voted for a rise.
“Bank of England holds rates at 3.75% as two MPC members vote for a rise, citing energy price inflation.”
The decision came just before the US-Iran peace deal was signed, a development that could reopen the Strait of Hormuz. The waterway normally carries a fifth of the world's oil and gas supplies. Should oil flow freely again, concerns over a pick-up in inflation would be eased.
“Oil prices have fallen in recent days, and that's encouraging,” said Bank governor Andrew Bailey. But he warned that the higher energy prices of the past four months meant there was already “inflationary pressure in the pipeline”.
“The Bank's job is to make sure that doesn't turn into sustained inflation above our 2% target,” he added.
Oil prices remain higher than before the conflict began and have “continued to be volatile”, policymakers said. They noted that inflation expectations by the end of the year were now lower than the Bank had thought in April, but that future rate policy would depend on the “scale and duration” of the energy price shock and how much it filters through to wages and prices.
Bailey described the decision to hold as “sensible in the light of the news”. He said he was “encouraged” by recent developments in the Middle East, adding: “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.”
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 MPC will meet again at the end of July, by which time the success and longevity of the peace deal should be clearer.
The Bank last cut rates in December, but upheaval in the Middle East has stalled any further reductions. The base rate, the primary tool to control inflation, influences the cost of borrowing and the interest paid to savers.