Two members of the Bank of England’s monetary policy committee voted for an immediate increase in borrowing costs as the Bank held interest rates at 3.75% for the fourth consecutive meeting. Megan Greene joined chief economist Huw Pill in pushing for a quarter-point rise to 4%, citing uncertainty over the impact of higher energy prices on households and businesses. The rest of the nine-person committee voted to keep rates unchanged, warning that a rapid reaction risked creating “undesirable volatility”.
Governor Andrew Bailey, speaking after the decision, said consumers should expect higher costs this year despite recent falls in oil prices following the US-Iran peace deal. “Oil prices have fallen in recent days, and that’s encouraging,” Bailey said. “But they’re still higher than before the war. 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 conflict in the Middle East has pushed up energy prices, and the Bank now expects inflation to rise to about 3.25% in the final quarter of this year – lower than in any of the three scenarios it laid out last month but still well above its 2% target.
“Bank of England holds rates at 3.75% as two policymakers vote for a rise, warning of inflationary pressure from Middle East energy prices.”
Bailey stressed that the Bank’s job was to ensure the current inflationary pressure did not become sustained. “Given the context at present of softness in the real economy and uncertainty around the scale and duration of the shock to energy prices, tolerating temporarily above-target inflation as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained,” he said.
The peace deal, signed on Wednesday, could lead to the reopening of the Strait of Hormuz, which normally carries a fifth of the world’s oil and gas supplies. Policymakers said oil prices had “continued to be volatile” and remained higher than before the conflict. The MPC met just before the deal was signed and will meet again at the end of July, when its success and longevity should be clearer.
Bailey described the decision to hold as “sensible in the light of the news”. But with two votes for a rise and inflation still above target, the prospect of higher borrowing costs remains on the table. The pound fell to a 10-week low after the announcement.