The Bank of England has left interest rates unchanged at 3.75% for the fourth consecutive meeting, as policymakers warned that high energy prices stemming from the Middle East conflict continue to fuel inflationary pressure.
Bank governor Andrew Bailey said recent drops in oil prices were “encouraging”, but cautioned that the past four months of elevated costs had already created “inflationary pressure in the pipeline”. 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.
“Bank of England holds rates at 3.75% amid Middle East energy price uncertainty, with two policymakers voting for a rise.”
“Energy prices have come down quite a lot, but they’re still above where they were before this conflict started,” Bailey said after the announcement. “I think holding is the right position to be in at the moment.”
The Monetary Policy Committee voted 7-2 to keep the base rate at 3.75%, a shift from the 8-1 vote in April. Chief economist Huw Pill was again joined this time by Megan Greene in voting for an increase to 4%. Greene highlighted uncertainty over how higher energy prices would affect households and businesses.
Policymakers noted that oil prices “continued to be volatile” and remained higher than before the conflict, but said inflation expectations by the end of the year were now lower than the Bank had projected in April. The committee stressed that future policy would depend on the “scale and duration” of the energy price shock and its impact on prices and wage demands.
“Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline,” Bailey said. “The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”
Price rises are still expected to accelerate in the UK as the delayed effect of higher wholesale energy costs feeds into domestic gas and electricity bills. The MPC will meet again at the end of July, when the success and longevity of the peace deal – and its effect on energy markets – should be clearer.