Bank of England chief warns of ‘difficult judgements’ around changes to interest rates
Bank of England (BoE) governor Andrew Bailey said there would be no rush to change interest rates, warning that “really difficult decisions” could be taken to balance another rise in inflation with the wider needs of the economy.
The war in Iran has caused oil prices to skyrocket due to the closure of the Strait of Hormuz, and even after the recent pullback, the price of Brent crude oil is still close to 40 percent higher than it was at the end of February.
This will be reflected in higher energy prices, which will mean higher household bills and increased costs for businesses, which will be reflected in part in the rise in prices of goods, including food.
Higher prices (in other words, rising inflation) are often combated by raising interest rates; This could reduce spending, suppress demand and therefore minimize price increases on the supply side, but the UK’s economic situation makes this a problematic decision.
This was due to a surprise increase in GDP in February, as well as long-term weakening growth and a labor market where unemployment exceeded 5 percent. In such cases, the BoE’s Monetary Policy Committee (PPC) will generally be more inclined to cut interest rates, which will encourage borrowing and spending.
This represents a delicate balancing act for Mr Bailey and MPC voters; This will take into account “meaningful” updated economic data, as well as the latest IMF warning that the UK faces the biggest hit to growth among major economies.
“There are some really difficult decisions to make,” he told the BBC. “We will not be making hasty decisions on these issues because there is a lot of uncertainty around this – not just how it will play out, but also how it will impact the UK economy.
“The faster this situation is resolved – I mean especially in terms of energy supply from the Gulf – the easier and better the outcome will be. And this is really critical right now.”
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
Get a free partial share of up to £100.
Capital is at risk.
Terms and conditions apply.
ADVERTISING
With the interest rate currently at 3.75 percent and the next vote scheduled for April 30, money markets reacted violently to the Iran war, at one point pricing in nearly four interest rate hikes throughout the year; but economists have largely denied that there is any real possibility of this happening.
While markets are still pricing in an approximate increase, it seems likely that the Bank of England will keep the current rate tight for now until more is known about how the UK is affected by the repercussions of the war (including whether this will actually lead to a quick resolution).
“Even if a peace deal is reached soon, a severe spell of stagflation appears locked in with rising energy costs expected to trigger large declines in investment and consumer spending, likely leaving growth weaker than many, including the IMF, expect,” said Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW).
“Although the Iran war has shifted policymakers’ focus to further raising rather than lowering interest rates, a prolonged policy pause remains likely, especially given that the likely pressure on growth from the conflict will help reduce inflation over time.”
Elsewhere, analysts are divided on what happens next.
KPMG chief economist Yael Selfin said British firms “face a double whammy of higher energy and borrowing costs”, which could lead to “investment plans being postponed or scaled back, as well as some of the costs being passed on to consumers in the form of price increases”.
But Quilter investment strategist Lindsay James says Thursday’s unexpectedly strong economic growth numbers could make room for cuts, while going in the opposite direction could “cut off any green shoots” [of economic productivity] those who managed to survive during this period.”
“The market still expects the BoE to cut rates at least once this year and have a fairly strong start to 2026, which could give it enough protection for that,” he said. “But at a time when some are predicting a complete halt to growth, the BoE will need to make a call on how much consideration it should take for any inflation rise and focus on the potential growth impacts that will follow.”
