Bank of England Holds Rates Amidst Renewed Middle East Tensions

The Bank of England's Monetary Policy Committee (MPC) held interest rates at 3.75% in its latest meeting, but three policymakers voted for an increase. This decision was influenced by renewed tensions in the Middle East, which raised concerns about another inflation shock. Despite UK inflation falling to 2.6%, the Bank expects it to rise to 3.2% in the autumn due to higher energy costs feeding through to household bills and the wider economy.

The three dissenting policymakers, Catherine Mann, Megan Greene, and Huw Pill, called for higher rates compared to a 7-2 split at the previous meeting. The Bank stated that crude and refined energy prices remained 'volatile and higher than pre-conflict', but there was little evidence of higher prices feeding into wage demands and domestic inflation.

Rob Wood at Pantheon Macroeconomics argued that investors should 'ignore the vote surprise' as the Bank's guidance was 'slightly less hawkish'. Wood expects rates to remain at 3.75% until the end of 2027, but notes that the risk of an increase is 'much larger than for a cut' due to the threat from energy prices.