The Bank of England left its benchmark interest rate unchanged on Thursday but issued a clear signal: if elevated energy prices trigger broad and persistent inflationary pressures, it stands ready to tighten monetary policy. This stance aligns with the Federal Reserve's decision on the same day.
The Monetary Policy Committee (MPC) decided to keep the benchmark rate at 3.75%, a level unchanged since last December. BoE Governor Andrew Bailey stated: "Our job is to ensure that any increase in inflation is temporary."
Three of the nine MPC members voted to raise the benchmark rate to 4%, reflecting heightened concern among some officials about the risk of second-round inflation effects. The pound edged up 0.08% against the dollar to $1.3376 following the decision. Aberdeen economist Felix Feather noted, "This is a slightly more hawkish BoE pause than expected."
Growing Divide: Three Members Push for Rate Hike to 4%
Among the nine MPC members, Megan Greene, Huw Pill, and Catherine Mann voted to raise the benchmark rate by 25 basis points to 4%, while the remaining six voted to hold steady. Greene pointed out that UK inflation has been above target for nearly five years, with signs of a second energy choke point blockage in the Red Sea and constraints in AI hardware supply chains adding extra supply-side pressure to markets. She stated, "Proactive rate hikes could reduce the likelihood of second-round inflation effects taking root."
Pill emphasized the "profound uncertainty" surrounding the energy price outlook, arguing that this uncertainty "could persist for an extended and unknown duration," making fine-tuning monetary policy risky. He explicitly stated that raising rates now would "send a clear, unambiguous signal to markets that we have the willingness and capability to address the upside inflation risks stemming from the Gulf situation."
Energy Price Volatility Makes Policy Path Hard to Anchor
The decision was made against a complex backdrop. Since the outbreak of the US-Iran conflict in late February, oil and gas prices have continued to swing violently, with fluctuating expectations about a Strait of Hormuz blockade making it difficult for markets to price risk. Global central bank policymakers generally fear that if energy prices remain high, companies will raise prices to protect margins, while workers may demand wage increases to maintain purchasing power, triggering second-round inflation effects.
UK headline inflation fell to 2.6% in June, a nearly 15-month low, providing support for the central bank's pause. Simon Dangoor, Deputy Chief Investment Officer of Fixed Income at Goldman Sachs Asset Management, said the current encouraging inflation data reduces the need for immediate action, and the central bank is "content to remain on hold for now." However, all MPC members agreed that the risk to the energy price path remains tilted to the upside, one of the most significant policy signals in this statement.
Collapse of US-Iran Memorandum of Understanding Becomes Key Policy Variable
Among the three hawkish members, Mann's stance is particularly noteworthy. She had already joined the minority advocating for a rate hike at the June meeting and has persisted in this position, clearly identifying the core factor that changed her judgment. "The key factor that altered my judgment was the collapse of the US-Iran memorandum of understanding," Mann said. "This conflict appears to be continuing intermittently and has become the new normal."
This statement implies that the evolution of the geopolitical situation in the Strait of Hormuz will directly influence the pace of the BoE's subsequent actions. If energy prices remain under pressure and inflation data fails to decline further, the momentum for rate hikes within the MPC could continue to build, gradually tilting the policy balance toward tightening.
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