The Bank of England has kept UK interest rates on hold as fears mount over rising inflation triggered by the Iran war.
Against a volatile backdrop in the Middle East conflict, the Bank’s monetary policy committee voted to keep its key base rate at the current level of 3.75%, although the decision was not unanimous.
The MPC voted by a majority of 6–3 to maintain Bank Rate at 3.75%, with three members voted to increase Bank Rate by 0.25 percentage points, to 4%.
BoE governor Andrew Bailey warned that events in the Middle East mean that the short-run path of inflation is uncertain owing to volatile energy prices.
“The possibility of repeated resumptions of conflict, combined with lower than usual European gas stock levels and a fall in global refining output, mean that risks to energy prices lie to the upside. Set against that, the process of underlying disinflation that was intact prior to the conflict remains in train. That provides some tentative evidence that inherited inflation persistence may be weaker than had been presumed,” explained Bailey, one of the six policymakers who voted to hold interest rates.
The Bank’s chief economist, Huw Pill, voted to raise interest rates, along with external policymakers Megan Greene and Catherine L Mann.
The decision comes as the rekindling of the Iran war and escalating tensions between Washington and Tehran fuel a surge in global energy prices, with the oil price climbing back above $90 a barrel this week to stoke renewed inflationary pressures in the world economy.
Financial markets had priced in a more-than-90% probability of Threadneedle Street keeping borrowing costs on hold, with the outside chance of a rate rise as a pre-emptive strike to guard against high inflation becoming entrenched. City investors expect a rise in borrowing costs to 4% before the end of the year.
The interest rate decision comes as Andy Burnham pushes to lower the cost of living after announcing a sweeping package of support for households and businesses in his first week as prime minister.
Under his plans, electricity bills in Great Britain will be reduced by an average of £45 a year from October, after he said the government would remove VAT from them. The policy is also expected to reduce headline inflation by 0.1 percentage point.
Official figures show inflation in the UK fell by more than expected in June to 2.6%, from a peak of 3.8% last year. However, the rate had been on track to fall close to 2% before the outbreak of the Iran war triggered a surge in the price of oil.