Bank of England holds interest rates at 3.75% – but rises expected in months ahead
The Bank of England (BoE) once again kept interest rates at 3.75 percent despite expectations that inflation will rise in the coming months.
Rates have been held at this level since December last year, but there is no widespread speculation that they will rise again later this year, largely due to the impact of the Iran war.
This time, the BoE’s Monetary Policy Committee (MPC) voted 6-3 in favor of a delay, highlighting both the number of dissenters and the general agreement that rates will move upward.
Rising fuel costs as a direct result of the conflict in the Middle East are affecting production, manufacturing, energy and transportation prices. Raising interest rates is the Bank’s primary tool to counter this and keep inflation from spiraling out of control.
But the reluctance to raise rates too soon can be explained by Britain’s extremely slow economic growth, unemployment hovering around 5 per cent and a property market that stagnated last year, with millions of homeowners abandoning mortgage deals signed when interest rates were much lower, meaning repayments are now significantly higher.
While it was emphasized at the MPC meeting that a loose labor market would go some way towards curbing inflation over time, it was also noted that there was “little evidence so far” that the second round effects of inflation (effectively higher prices and wages) were occurring.
However, on a telling note, it also warned that “risks to the inflation outlook remain upside” compared to the July meetings and that “the outlook could change materially as events in the Middle East unfold”, while also agreeing that the risk of oil prices rising over a longer period is more likely than the hoped-for bearish scenario.
All three MPC members who voted to raise interest rates underlined that inflation has been above the 2 percent target set by the government for more than five years, adding that a preemptive move to increase could be less damaging in the long run; “setting policy as if there were stronger second-round effects and correcting course if necessary would be less costly than the other way around.”
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Looking ahead to the rest of the year, XTB research director Kathleen Brooks says the expectation remains for the MPC to move to 4 per cent by winter and possibly by the next meeting – although the date of John Healey’s first Budget as chancellor could affect this.
“The interest rate futures market is pricing in two rate cuts next year, and there is currently a 52 percent chance of a rate hike in September and a 56 percent chance of a hike in November,” he said. “If the BoE is still considering a rate hike at this stage we think November is more likely because by then the committee will have a better idea of the 2027 pay awards and the Budget should have been announced, which will give the MPC a clearer idea of the new Prime Minister’s economic policy.”
