Bank of England holds interest rates at 3.75% but warns cost of living will rise over Iran war fallout
Policymakers said a recent fall in energy prices meant it was no longer expecting inflation to go as high as it was in April.
The Bank of England has left interest rates unchanged at 3.75% but warned that the cost of living was still set to rise this year because of the fallout from the Iran war.
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Seven of the Bank’s nine-person Monetary Policy Committee (MPC) voted to keep interest rates the same at the latest meeting, while two opted to hike them to 4%.
Policymakers still said that a recent fall in energy prices meant it was no longer expecting inflation to go as high as it was in April.
Andrew Bailey, governor of the Bank of England, said: “We’ve held bank rate at 3.75% today.
“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.
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“The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”
New inflation data had reinforced expectations that policymakers would not need to increase interest rates at the announcement.
The official figures showed the rate of Consumer Prices Index (CPI) inflation stayed at 2.8% in May, the same as in April.
It was lower than expected by economists, who had predicted an uptick in inflation to 3%.
While remaining above the Bank’s 2% target level, the lack of movement in May will provide some relief to its Monetary Policy Committee (MPC) which uses interest rates as a tool to control inflation.
UK inflation is still widely expected to accelerate over the coming months, as the impact of the Iran war feeds further into the economy.
Katie Horne, banks relationship manager at Flagstone, said: “April’s surprise inflation dip is widely expected to have been a fleeting reprieve.
“This month the rate has steadied, but we’re yet to hear the firing gun on a longer-term downward inflationary trend.
“Despite higher-than-desired inflation on both sides of the Atlantic, expectations of a UK base rate change in June have been limited.
“However, the chances of a base rate hike in the second half of this year are starting to look increasingly likely, particularly after the ECB hiked its rate on June 11 in response to the energy price shock overspilling into the wider economy."
She added that a base rate hold over the early summer would help "sustain a competitive and compelling savings rates market, but it could take further steam out of an already fairly stagnant housing market.“
"House price growth slowed to 1.7 per cent in May from 3 per cent in April and average house prices slid by 0.6 per cent in May,“ she said, adding: "Hopeful homebuyers with ready-to-go deposits would be wise to ensure their funds are working hard for them while they wait out the effects of the conflict in the Middle East.“
The Bank will be keeping a watchful eye over the cost of living, and questions remain over whether policymakers will need to resort to raising interest rates later in the year.
Last week, the European Central Bank opted to increase its interest rate for the first time in almost three years, noting that the conflict was “generating inflation pressures”.
The US Federal Reserve will also announce its next interest rate decision on Wednesday evening and is widely expected to keep rates on hold.