The Bank of England has left interest rates unchanged at 3.75% for the fourth consecutive meeting, as policymakers warned that inflationary pressure from high energy prices during the Middle East conflict remains “in the pipeline”.
Bank governor Andrew Bailey said recent falls 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”. The base rate, the primary tool used to control inflation, influences the cost of borrowing and interest paid to savers.
“Bank holds rate at 3.75% for fourth meeting, warning energy price pressures remain despite oil falls.”
The Monetary Policy Committee voted 7-2 to hold, with chief economist Huw Pill and Megan Greene dissenting in favour of a rise to 4%. Greene highlighted uncertainty over the impact on households and businesses of higher energy prices.
The decision came just before the US-Iran peace deal was signed on Wednesday, which could lead to the reopening of the Strait of Hormuz. Normally carrying a fifth of the world’s oil and gas supplies, the waterway’s reopening would ease concerns over a pick-up in inflation if oil starts flowing freely again. The MPC will meet again at the end of July, when the deal’s success and longevity should be clearer.
Policymakers said oil prices remained higher than before the conflict and had “continued to be volatile”. However, they noted inflation expectations by the end of the year were now lower than the Bank had thought in April. Interest rate policy 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.
“Oil prices have fallen in recent days, and that’s encouraging,” Bailey said. “Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline. The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”
Speaking later, Bailey added he was “encouraged” by recent developments in the Middle East. “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,” he said. “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. Millions of households face a fresh squeeze on their finances as the full effect of the energy shock works its way through.