Bank of England governor Andrew Bailey called the recent slide in oil prices “encouraging” – but warned that four months of elevated energy costs meant “inflationary pressure” was already baked into the system as the central bank held interest rates at 3.75% for the fourth consecutive meeting.
The decision, taken by the Monetary Policy Committee just before the US-Iran peace deal was signed on Wednesday, was not unanimous. In a 7-2 split, Megan Greene joined chief economist Huw Pill in voting for a rate rise to 4%, citing the uncertainty over how higher energy prices would hit households and businesses.
“Bank of England holds rates at 3.75% for fourth time as oil price fall offers hope but inflationary pressure persists.”
“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 after the announcement. “The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”
That target now appears further off than previously hoped. The Bank said it would “tolerate a slow return” to the 2% goal, even as it acknowledged that inflation expectations by the end of the year were lower than it had forecast in April. Price rises are still expected to accelerate in the UK because of the delayed impact of higher wholesale energy costs on domestic gas and electricity bills.
The peace deal between the US and Iran, signed on Wednesday, could transform the outlook. If it leads to the reopening of the Strait of Hormuz – the vital waterway that normally carries a fifth of the world’s oil and gas supplies – then the risk of an inflation spike would be substantially eased.
“Oil prices have fallen in recent days, and that’s encouraging,” Bailey said. “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.”
The Bank last cut rates in December. The upheaval in the Middle East had stalled any further reductions. Policymakers noted that oil prices “continued to be volatile” and remained higher than before the conflict. The committee will meet again at the end of July, by which time the success and longevity of the peace deal should be clearer. For now, Bailey is prepared to wait.