The Bank of England held interest rates at 3.75 percent on Wednesday in a 6-3 vote, as Governor Andrew Bailey warned the world feels "as uncertain and volatile" as it did when the US-Iran war erupted.
The split on the Monetary Policy Committee widened after rate-setter Catherine Mann switched sides to back an immediate quarter-point rise to 4 percent, joining colleagues Huw Pill and Megan Greene. Mann blamed the "collapse" of the US-Iran ceasefire, the "widening of the Middle East conflict" and "associated volatility in energy prices."
Bailey said holding rates was "appropriate" even as global conditions became more "inflationary," while domestic circumstances remained "more benign." He nonetheless cautioned against reading too much into his remarks, telling reporters: "Please do not leave this room thinking the Bank is edging towards a hike, because there's nothing in what I said along those lines."
Traders still expect at least one rate rise this year, though the probability of a move at the MPC's next meeting in September was trimmed to less than 30 percent. Yields on ten-year UK government bonds fell 5 percent, reversing a spike from the day before.
Deutsche Bank's chief UK economist Sanjay Raja said: "The longer tensions in the Middle East continue, the higher the risk of a policy shift in the coming months." The Bank said it was "standing ready to act" if conflict persists and inflation stays above its 2 percent target.
The Bank now expects inflation, currently at 2.6 percent, to peak above 3 percent in 2026 as typical household energy bills rise from £1,663 to £1,680. In a worst-case scenario, inflation could top 4 percent next year if oil prices exceed $100 a barrel; Brent crude currently trades just above $90.
Economic growth is forecast at a "subdued" 1.1 percent this year, with activity expected to "weaken slightly" in coming quarters. Unemployment, now at 4.8 percent, is projected to rise "gradually" to 5.1 percent by year-end.
