Bank of England Keeps Interest Rates on Hold

Today, the BOE’s (Bank of England) MPC (monetary Policy Committee) voted 8 – 1 to hold the benchmark interest rate steady ay 3.75%, with the Chief Economist, Huw Pill, being the only dissenting member voting to increase interest rates by 25 basis points. Interestingly, other members of the MPC acknowledged that in future meetings they might in fact join Mr Pill in calling for a rate increase.

Officials noted that in the Q3 of this year, they now forecast that inflation will be circa 1.4% higher than their original forecast in the last report issued this February. Indeed, Governor Andrew Bailey said, “holding rates was a reasonable place to be given the softness in the UK economy”, but argued that rates may well have to rise because of the disruptions to energy supplies due to the current Middle East situation. 

Clare Lombardelli and Dave Ramsden, both Deputy Governors, plus external members Catherine Mann and Megan Greene, all signalled that in the future, rates may need to go up tightening financial conditions. The MPC noted that it stands ready to act, should further data shows negative impacts on inflation, such language indicating they will raise interest rates if need be.

Governor Bailey said, “attempting to bring inflation back to target too quickly after a shock like this may cause undesirable volatility in output. There is not much monetary policy can do to prevent these cost increases from affecting UK businesses and households. Thursday’s wild swings in the oil price were an example of how the BOE simply cannot stop the music and make decisions based on a certain level of expected cost pressures”. 

Latest official data shows that the CPI (Consumer Price Index) rose to a three month high of 3.30% in March on the back of accelerating fuel prices. The price of motor fuels month-on-month saw the largest increase since June 2022, jumping by a spectacular 8.70% as disruption to transportation and oil production drove prices higher for both diesel and petrol. Officials of the BOE suggested that if the Middle East conflict were to continue and worsen, inflation could rise as high as 6.20%.

Due to the uncertainty surrounding the Iran conflict, the BOE this time round has not published any forecasts for inflation and other key economic indicators. Instead, the BOE has produced three scenarios based on energy prices and “second round effects”. In the toughest case, scenario C, they suggest that inflation could peak to around 6.20% in early 2027, and stay above the BOE’s 2.00% inflation target for years, forcing interest rates higher.