The Bank of England held interest rates at 3.75% for the fourth meeting in a row on Thursday, as policymakers warned that high energy prices during the war in the Middle East had left “inflationary pressure in the pipeline”.
The Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged, with chief economist Huw Pill and Megan Greene voting for a rise to 4%. Greene highlighted the uncertainty over the impact on households and businesses of higher energy prices.
“Bank of England holds rates at 3.75% for fourth time; two policymakers voted for a rise to 4% amid energy price uncertainty.”
Bank governor Andrew Bailey said recent falls in oil prices were “encouraging” but that the past four months of elevated prices meant inflation was higher than expected. “Whatever happens in the future, the higher energy prices of the past four months mean there's already some inflationary pressure in the pipeline,” he said. “The Bank's job is to make sure that doesn't turn into sustained inflation above our 2% target.”
The decision came just before the signing of the US-Iran peace deal, which could lead to the reopening of the Strait of Hormuz – a vital waterway that normally carries a fifth of the world's oil and gas supplies. If oil flows freely again, concerns over a pick-up in inflation would be eased. Bailey said he was “encouraged” by recent developments but noted that energy prices, though lower, remained above pre-conflict levels. “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.”
Despite the peace deal, price rises are still expected to accelerate in the UK as the delayed impact of higher wholesale energy prices 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 should be clearer.