The Bank of England has kept interest rates unchanged at 3.75% after warning that renewed conflict in the Middle East could feed another rise in inflation and add to the squeeze on living costs. The monetary policy committee voted 6-3 to hold, with the majority opting to wait as officials weighed softer domestic growth against a jump in energy prices.
According to the Bank, the latest surge in oil and gas costs has changed the outlook. Brent crude briefly moved above $90 a barrel and had earlier touched more than $100 in a more severe scenario the Bank outlined. In that adverse case, involving a prolonged war and sustained high oil prices, UK inflation could peak at 4.5% by the middle of 2027. Its central forecast, however, still assumes oil falls back to around $71 a barrel and inflation reaches about 3.2% later this year.
Markets had expected a hold
Financial markets had already largely priced in no change, with investors seeing only a small chance of a rise. Some in the committee wanted a tighter stance: Catherine Mann joined Megan Greene and Huw Pill in voting for an immediate increase to 4%. The Bank said inflation had fallen more quickly than expected in June, when the UK rate dropped to 2.6% from 3.8% last year, but added that higher borrowing costs, weaker labour market conditions and slower growth should help bring price pressures down over time.
Governor Andrew Bailey said the conflict was keeping energy prices high and volatile, and that any rise in inflation later this year should be temporary. The Bank also noted that government measures, including lower electricity bills in Great Britain from October and a £2 cap on bus fares, could trim headline inflation slightly. Even so, policymakers stressed they would act if needed to stop inflation becoming entrenched, while markets continued to expect borrowing costs could still reach 4% before year-end.
Source: theguardian.com
