Bank of England members vote 9-0 to keep rates on hold
The Bank of England’s nine rate setters voted unanimously to keep borrowing costs steady at 3.75 per cent in the face of inflation risks from war in the Middle East, with some raising the possibility of having to raise rates.
Economists polled by Reuters had mostly expected a 7-2 vote in favor of the “pause” resolution.
The Monetary Policy Committee said inflation could rise as high as 3.5 percent in the next two calendar quarters, according to BoE staff forecasts, and that it was alert to the risk of high inflation expectations settling into the economy.
He also noted the risks of an economic slowdown that could weaken inflation pressures, but said the bigger risk was high inflation.
BoE Governor Andrew Bailey said oil prices were already high and household energy bills would rise towards the end of this year if the conflict continues.
“We have kept interest rates at 3.75 percent while we evaluate how events will develop,” Bailey said in a statement.
“No matter what, our job is to ensure that inflation returns to the 2.0 percent target.”
Immediately after the decision was announced, sterling briefly jumped against the US dollar and euro, and investors were betting that the BoE would raise interest rates by two quarter points this year.
Yields on two-year UK government bonds, which are sensitive to speculation on rates, hit 4.43 per cent, the highest since January 2025, and jumped a whopping 33 basis points on the day, extending an earlier rise triggered by news of further damage to gas infrastructure in Qatar.
“What’s striking is that all policymakers voted to suspend the policy, which shows that even the more dovish members of the committee want to see how this conflict plays out before it gets cut again,” said Luke Bartholomew, deputy chief economist at investment firm Aberdeen.
“While the hurdle to returning to rate hikes is very high, the economy may face a long wait until the next rate cut.”
Other MPC members were more open-minded about whether interest rates should be raised, a possibility that was priced in by investors after the start of the war.
Catherine Mann said she thought the BoE should consider a longer pause in interest rates “or even a hike at some point” to prevent inflation from getting stuck too high.
BoE chief economist Huw Pill, who voted against the latest rate cuts, said the BoE was “ready to act” if the energy price shock increased the risk of long-term inflationary pressures.
But Alan Taylor, one of the most vocal supporters of rate cuts, said the BoE’s decision to keep interest rates steady should not be seen as a turning point.
“Given the great uncertainty in energy prices, I see a high bar for an increase right now,” Taylor said.
The MPC said it may have more information at its next meeting in late April to better assess the situation.
The BoE has cut borrowing costs more slowly than the European Central Bank since 2024 due to concerns about the UK’s stubbornly stronger price pressures.
Just as UK inflation looks set to fall to the BoE’s 2.0 per cent target and stay there, according to analyst forecasts based on the latest energy prices, the rise in oil and gas prices threatens to push inflation back up, possibly to 4-5 per cent.
This rate will remain well below the 11.1 percent peak seen in 2022 following Russia’s full-scale invasion of Ukraine, which caused a much larger increase in energy prices.
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