Bank of England holds rates at 3.75% as inflation risks keep policymakers cautious

Traders Union
All News
Financial News
BOE holds rates amid inflation

Highlights

Bank of England holds interest rates at 3.75% by a 7-2 vote, with Megan Greene and Huw Pill dissenting for a 0.25% hike.
BoE projects UK inflation will rise above 3.25% in Q4 2024 from 2.8% in May, lower than prior 3.6%-3.7% scenarios.
Underlying UK economic growth upgraded to 0.2% per quarter as higher energy prices sustain inflation expectations at their highest since 2009.

June decision reflects split over inflation outlook

As reported by Reuters, the Bank of England's Monetary Policy Committee votes 7-2 to keep interest rates on hold at 3.75%, matching economists' expectations. External member Megan Greene joins Chief Economist Huw Pill in calling for a quarter-point increase, while most other members stick with Governor Andrew Bailey's "active hold" approach.

The stance keeps the BoE apart from the European Central Bank and the Bank of Japan, which both raise rates in the past week, and from projections published after the U.S. Federal Reserve's first meeting under new chair Kevin Warsh, where policymakers indicate rates are likely to rise later this year.

In a statement issued alongside Thursday's decision, Bailey says it is too soon to conclude that the inflation threat has passed. The BoE expects inflation to rise above 3.25% in the final quarter of this year from 2.8% in May, although that increase is smaller than the 3.6% to 3.7% range it projected in April under two of its three main scenarios.

Energy costs and public sentiment shape the backdrop

A tentative truce between the United States and Iran promises to reopen the Strait of Hormuz and lower oil prices, which could ease pressure on Britain because it relies heavily on imported natural gas. Even so, policymakers say the higher energy prices of the past four months are already feeding inflationary pressure through the economy.

The central bank is also slightly more upbeat on growth, estimating the economy is expanding at an underlying rate of 0.2% a quarter, up from 0.1% in its previous forecasts despite a small fall in output in April. Pill and Greene argue that a rate increase is needed now to help contain households' inflation expectations, which stand at their highest level since at least 2009 in the BoE's quarterly survey, even though a monthly survey shows they are easing.

Catherine Mann appears closest to joining the two dissenters, saying inflation risks are more prominent than for other members who support no change. Deputy Governor Clare Lombardelli says the risk of damaging second-round inflation effects is increasing as high energy prices persist, though the evidence so far points to a standard pass-through rather than a more severe inflation spiral.

Inflation has stayed above the BoE's 2% target for most of the past five years after repeated shocks since the COVID-19 pandemic, including Russia's 2022 invasion of Ukraine, which pushed British inflation above 11%. The higher cost of living remains politically sensitive in the UK, where Prime Minister Keir Starmer faces weakening popularity after his election victory two years ago.

Our earlier coverage of the Bank of England’s rate outlook focused on expectations that the MPC would keep the policy rate unchanged at 3.75% while assessing how a tentative truce involving Iran could influence energy prices and UK inflation. We also noted that May inflation held at a 13-month low of 2.8%, which eased pressure for near-term tightening even as policymakers remained wary of second-round inflation effects and higher year-end inflation scenarios.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.