The Bank of England has left interest rates unchanged at 3.75% despite concerns that higher energy costs linked to the conflict in the Middle East could push inflation higher in the months ahead..reports Asian Lite News Desk
The Bank of England has warned that households are likely to face higher costs this year as the economic effects of the conflict in the Middle East continue to feed through to the economy, despite a recent decline in oil prices following an initial peace agreement between the United States and Iran.
The warning came as the Bank left interest rates unchanged at 3.75%, with seven members of its nine-strong Monetary Policy Committee (MPC) voting to maintain the current rate. Two members backed an immediate increase, signalling continuing concern about inflationary pressures and the possibility that borrowing costs could rise in the coming months.
Speaking after the decision, Bank of England Governor Andrew Bailey said there was “still some inflationary pressure in the pipeline” as a result of higher energy prices during the conflict.
Recent developments in global energy markets have eased some concerns. An agreement brokered by US President Donald Trump with Tehran has contributed to a sharp fall in oil prices in recent days. At the same time, official figures released on Wednesday showed UK inflation stood at 2.8% last month, lower than some economists had feared.
The Bank now expects the impact of the conflict on inflation to be less severe than initially anticipated. It forecasts that the Consumer Prices Index (CPI) will rise to around 3.25% during the final quarter of the year. While this is lower than any of the scenarios outlined by the Bank last month, it remains significantly above the institution’s 2% inflation target.
Explaining his support for keeping rates unchanged, Bailey said reacting too quickly to short-term inflationary pressures could create unnecessary instability. He also pointed to signs of weakness in the wider economy, including the labour market, which could help prevent inflation from becoming entrenched.
“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 above-target inflation temporarily as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained,” Bailey said.
He added, “Oil prices have fallen in recent days, and that’s encouraging. 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.”
Bailey said the Bank would act to ensure inflation does not remain above its target for a prolonged period.
Financial markets reacted to the announcement by pushing the pound down to a 10-week low of $1.32 against the US dollar. Sterling also weakened against several other major currencies. Despite the Bank’s lower inflation forecasts, investors continue to expect at least one interest rate increase before the end of the year. Minutes from the MPC meeting showed policymakers remain concerned that higher energy costs could spread into broader price increases across the economy.
“The committee will continue to monitor the situation in the Middle East and how its impact propagates through the economy. The committee stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term,” the minutes said.
Megan Greene, an external member of the MPC, joined the Bank’s chief economist, Huw Pill, in voting for a quarter-point increase to 4%. Pill had also supported a rise at the Bank’s previous meeting in May. The Bank’s decision contrasts with the approach taken by the European Central Bank, which raised interest rates last week to curb inflation.
MPC members also noted that borrowing costs for households and businesses have already risen since the outbreak of the conflict in Iran. According to the minutes, movements in bond markets have passed through quickly to mortgage rates and business lending costs, despite no change in official interest rates.
Meanwhile, figures published by the Office for National Statistics showed the number of UK job vacancies fell to its lowest level in five years as employers scaled back recruitment. However, the labour market has proved more resilient to the economic effects of the conflict than some analysts had expected.
Markets are also monitoring the outcome of the Makerfield by-election, with investors wary of any political uncertainty that could affect confidence in UK government bonds. Asked about the vote, Bailey said: Stability is important, I think everybody recognises that. This is not one part of the political spectrum versus another. I think everybody recognises the importance of stability.”
The Bank’s decision followed a similar move by the US Federal Reserve, which on Wednesday left US interest rates unchanged at 3.5%-3.75%, where they have remained since December. The meeting was the first chaired by Kevin Warsh, who succeeded as Federal Reserve chair in May.
