Bank of England holds interest rates at 3.75% despite inflation fears
However the Bank warned that the conflict in the Middle East would mean high and volatile energy prices
Th Bank of England is expected to hold interest rates at 3.75% next week despite inflation fears amid fresh uncertainty in the Middle East.
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It marks the fifth time in a row that the Bank has kept the rate unchanged, despite ongoing uncertainty about the effect of the ongoing turmoil in the Middle East on energy prices.
A majority of the central bank’s nine-strong Monetary Policy Committee (MPC) voted in favour of keeping interest rates at 3.75%.
However it cautioned that energy prices and an AI-driven memory chip shortage will drive inflation higher.
Forecasts by the central bank have also suggested that food inflation is set to tick higher later this year as supply issues linked to hot and dry weather weigh on prices for shoppers.
Six members of the MPC voted in the favour of keeping the rate steady, while three called for an increase to 4%.
Andrew Bailey, governor of the Bank of England, said: “Inflation has fallen faster than we’d expected, but the conflict in the Middle East continues to mean high and volatile energy prices.
“That will cause inflation to rise again later this year.
“However the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”
Last month, UK inflation eased to a 15-month low at 2.6% due to a slowdown in food and fuel prices.
The recent decline will have provided some relief to the MPC, which uses interest rates as a tool to control inflation.
The Bank's rate controls the rates set by other lenders, impacting consumer payments on mortgages, loans and savings.
In the first monetary policy report since Andy Burnham became Prime Minister, the Bank painted a slightly improved outlook for the state of the economy.
It indicated that inflation is likely to peak slightly below previous forecasts, while growth could be stronger.
It suggested that consumer price inflation – which was recorded at 2.6% last month – is likely to peak around 3.2% later this year, before steadily easing back towards the Bank’s 2% inflation target.
Higher oil prices linked to the Middle East conflict are expected to be the main driver of inflation, pushing energy prices higher for households and businesses in the coming months.
Economist Suren Thiru said a September rate rise was “on the table” after the Bank’s 6-3 policymaker vote.
The chief economist at the Institute of Chartered Accountants in England and Wales said: “The tighter vote split in favour of this outcome confirms a further hawkish shift within the committee with inflation worries outweighing concerns over the economy, keeping a September rate rise on the table.
“Interest rates remain on a knife edge.
“Policy could stay unchanged for the rest of the year, with rate-setters relying on tough talk rather than higher rates to contain inflation.
“But the longer the Iran conflict persists, the greater the risk that the committee’s patience finally snaps.”