BOE Warns Inflation Could Reach 4% as it Holds Interest Rates

The Bank of England (BOE) held interest rates steady at 3.75% on Thursday, but warned that prolonged conflict in the Middle East may require tighter policy. In a 6-3 vote, the Monetary Policy Committee decided not to raise interest rates, despite three members voting for a hike to 4%. BOE governor Andrew Bailey said that higher global energy costs have had a limited effect on prices and wages in the UK so far, but warned that this could change if volatility persists.

According to the BOE, inflation risks have tilted further to the upside since its last set of economic forecasts in July. The central bank noted that the move in energy prices bears similarities to its 'adverse' scenario that risked entrenching inflation. While there are no signs yet of persistent pressure from the labour market and businesses' pricing, the BOE said the risk is growing.

The BOE also rewrote its plan to run down its stock of British government bonds accumulated in past attempts to stimulate the economy. It will halt its sales of gilts to the market for now and instead aim to cut its stock of gilts held for monetary policy purposes to zero by 2034.