Amid the Iran war and the resultant energy shock continuing to drag the global economy, the Bank of England (BoE) has kept interest rates on hold while issuing a warning that they might have to go up if the volatile geopolitics drags on.
The apex bank’s Monetary Policy Committee, while predicting British inflation likely topping 4% early 2027, voted 6-3 to keep rates at 3.75%, in line with July’s vote.
The BoE not only refrained from increasing rates like its global peers but also surprised many by pausing its sales of government bonds for six months.
BoE will now begin a longer-term overhaul of how it shrinks its debt holdings.
Governor Andrew Bailey said the key question of whether the energy price surge causes broader inflation pressures remained unanswered.
“That feed-through has been quite subdued, but it is early days,” he told broadcasters.
“But we’re watching the situation very carefully, and we will continue to do so. And we’ve given… a very, very clear message today. The longer the situation goes on, the more difficult this becomes,” Bailey said further.
“Interest rates are at a critical cliff-edge moment,” said Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, while reacting to Bailey’s announcement.
“While policy could still remain on hold this year, persistent US-Iran hostilities mean the risk of a rate hike has shifted from a possibility to a probability,” he told Reuters.
While a section of the analysts expected the BoE to raise rates only once, Bailey said the outlook was too uncertain to judge whether the BoE will increase its interest rates in the coming days.
Chief Economist Huw Pill and external MPC members Megan Greene and Catherine Mann again voted to raise interest rates by a quarter-point. On the other hand, Bailey and his deputies Sarah Breeden, Clare Lombardelli, and Dave Ramsden all signalled they could back a rate rise.
“Inflation risks had tilted further to the upside since our last set of economic forecasts in July,” BoE said, adding the upward move in global energy prices since then bore similarities to its “adverse” scenario that risked entrenching inflation.
While the BoE noted that signs of persistent pressure were not yet showing up in wage demands or pricing by businesses, the central bank admitted that the risk was growing.
The interest rate hikes, if they happen in the coming days, will put Prime Minister Andy Burnham and his finance minister, John Healey, under tremendous stress, with the duo already struggling to strike a positive tone about the economy before the budget on October 28.
The BoE increased its estimate of quarterly economic growth for the Q3 to 0.4% from its previous 0.1% estimate but said inflation, at 3.1% in August, could “now reach slightly over 4% in early 2027,” more than double the central bank’s 2% target.
Regarding inflation, it has exceeded the 2% target in all but three months over the past five years.
On oil price pressures, the BoE said, “Given the lags with which second-round effects appeared, it was not appropriate to wait too long for evidence of such effects before responding with policy.”