The Bank of England held its Bank Rate at 3.75% for a fifth straight meeting, with three of nine policymakers pushing for an immediate quarter-point increase as the Israel-Iran conflict threatens to push energy prices and inflation higher. Sterling barely moved, while investors now see a bigger chance the Bank holds again in September.
The Bank of England held its Bank Rate at 3.75% for a fifth meeting in a row on Thursday, even as the conflict between the US and Iran threatens to push inflation higher again. The Monetary Policy Committee split 6-3, with Megan Greene, Huw Pill and Catherine Mann dissenting in favor of a quarter-point rise. That would have taken the rate to 4%.
Sterling barely reacted to the decision. The pound eased about a quarter cent against the dollar, to $1.3378, leaving it almost flat for the day.
Inflation risk shifts to the upside
UK inflation eased to 2.6% in the year to June, a 15-month low. But that relief may not last: volatile oil and gas prices tied to the Middle East conflict have pushed the Bank to expect a renewed pickup later this year.
In a worst-case scenario, where oil reaches $100 a barrel, the Bank now projects inflation could reach 3.2% in 2026, down from the 3.5% peak it forecast previously. A calmer scenario, where oil hovers near $76 before slipping to $71, points to inflation near 3% instead.
Growth outlook improves, but the current quarter could stall
The Bank now expects the economy to grow 1.1% this year, ahead of the forecast it made in April. Under its central scenario, the Guardian reported the Bank sees growth holding at 1.1% in 2027 before rising to 1.7% in 2028. Yet growth in the third quarter is projected to slow to around 0%, as the fallout from the Iran war weighs on demand.
Three policymakers make the case for a hike now
According to CNBC, Greene said a hike now would cut the risk of persistent inflation: "A proactive hike in Bank Rate may reduce the probability that second-round effects set in." Pill and Mann joined her in backing the rate hike.
Traders took the outcome as a dovish signal. Investors now see a 64.3% chance the Bank holds again in September, up from 53.6% before Thursday's statement.
Sources: BBC News, CNBC, The Guardian
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