The Bank of England's Monetary Policy Committee (MPC) voted to hold interest rates at 3.75% in a 6-3 decision. This decision was in line with market expectations, although some City banks had anticipated more members to vote for a hike. The MPC's decision was influenced by several factors, including the breakdown in relations between the US and Iran and the widening Middle East conflict, leading to volatility in energy prices. Governor Andrew Bailey stated that while inflation has fallen faster than expected, the conflict in the Middle East means high and volatile energy prices, which are expected to cause inflation to rise again later this year.
The three MPC members who voted for a 25 basis point hike were Chief Economist Huw Pill and external members Megan Greene and Catherine Mann. Mann specifically cited the collapse of the US-Iran Memorandum of Understanding as a key factor in her decision. These members believed a proactive hike would reduce the probability of second-round effects taking hold, where higher inflation and wage growth spiral out of control. Conversely, those who voted to hold believed that global conditions looked more uncertain and inflationary, while domestic conditions were more benign regarding inflation prospects. They also noted little evidence of second-round effects yet.
Despite the hold, the futures market is pricing in a 65% chance of a rate hike in September and almost two quarter-point increases by the end of the year. This sentiment is partly driven by the MPC's commitment to ensuring inflation returns to its 2% target. Officials indicated that the MPC would likely opt to hike interest rates if inflation rose, with one scenario suggesting six interest rate hikes if oil prices hovered around $130 per barrel. The Bank also noted that higher yields for UK government bonds are already weighing on nascent inflation pressures, contributing to containing price growth.
