Bank of England ‘Ready to Act’ on Rising Prices as Interest Rates on Hold
The Bank of England “stands ready to act” to keep interest rates at a level that will keep inflation under control, its governor Andrew Bailey has said, after the conflict in the Middle East prompted a sea-change in the debate over borrowing costs. His comments came as the Bank announced it was leaving its key rate unchanged at 3.75%.
Unusually, the vote among the nine members of the rate-setting committee was unanimous, with all backing the decision to wait and “assess how events unfold”, and there was also talk of the next move being a rise in rates.
The Bank said prices would rise more quickly due to the “new shock to the economy”. It now expects inflation to be close to 3.5% in March.
Before the US-Israel attack on Iran, economists had expected inflation and interest rates to fall further this year. Some had pencilled in a rate cut for March.
But the conflict has pushed up the price of oil and gas sharply, with attacks on energy infrastructure in the last 24 hours adding further upward pressure. That has raised the prospect of another pick-up in inflation as energy price rises push fuel, fertiliser and other prices higher. “War in the Middle East has pushed up energy prices. You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year,” said Bailey.
The only way to address higher energy prices was by restoring safe passage for shipping in the Gulf, he said.
But he emphasised the focus of the Bank’s Monetary Policy Committee (MPC) was on the wider knock-on impact on prices. “Whatever happens, our job is to make sure inflation gets back to its 2% target,” said Bailey.
The language at recent meetings of the MPC has centred around a reduction in borrowing costs over the course of the year. At February’s meeting members were split, with four members backing a cut and five, including the Bank’s governor, voting to hold rates steady.
Notes from this meeting showed the debate has been turned on its head, with the committee backing a hold in rates, the first time all members have voted the same way since September 2021. And they discussed whether a rate rise could be required in the coming months, something which financial markets now think could be the next move.
The BBC news service is reporting that following the Bank’s latest decision and comments, traders are predicting there could be two hikes before the end of the year, taking rates to 4.25%.
The government has repeatedly highlighted falling interest rates, which started to come down in August 2024, as a mark of its success in steadying the economy and creating a more optimistic scenario for growth.
Uncertainty over how long the Middle East conflict might last, and what the longer term impact on energy prices might be, has also led other central banks to hit the pause button on rate moves.
The US central bank said on Wednesday that borrowing rates would remain in the 3.5% to 3.75% window, with Federal Reserve chairman Jerome Powell saying it was “too soon” to say how the Iran war would affect the outlook but leaving the window open for a rate cut later in the year.
The Bank of Japan held interest rates at 0.75% on Thursday, and the European Central Bank is expected to hold rates at 2% when it announces its decision later.
The wave of price rises that came in the wake of Russia’s invasion of Ukraine has cast a long shadow over central banks’ decision making. Rate setters on both sides of the Atlantic came in for criticism for acting too slowly. As a result central bankers are expected to exercise extra vigilance this time round.
Bailey said uncertainty over the duration of the disruptions remained but that monetary policy would have to respond to “the risk of a more persistent effect” on prices.
Households and businesses would be “more sensitive” to any new pick-up in inflation, he said. “I will be monitoring developments extremely closely and stand ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term,” Bailey said.
The Bank made clear that the discussion covered a “range of possibilities” for the future path of rates.
“A larger or more protracted shock” from the Middle East conflict would require “a more restrictive policy stance”, it said. But policy would be eased if the shock was “very short-lived” or if inflationary pressures were falling due to slack in the economy.
The next rate-setting meeting is scheduled for April, although the Bank can call emergency meetings if it considers it necessary.