The Bank of England has opted to keep interest rates unchanged in a majority vote, though internal divisions highlight persistent inflation pressures.
The Monetary Policy Committee (MPC) decided on Thursday to maintain the benchmark rate at 3.75% by a vote of 7 to 2, noting that the recent decline in oil prices was "encouraging." However, two members voted for an immediate 25 basis point rate hike, reflecting deep concerns about the persistence of inflation. The committee reiterated it stands ready to act against inflation risks.
External member Megan Greene joined Chief Economist Huw Pill, who was the sole dissenter in April, with both advocating for a rate increase to 4%. Concurrently, the committee revised down its forecast for the peak inflation rate in the fourth quarter of this year to 3.25% from 3.6%, while keeping its existing policy guidance unchanged.
This decision comes as progress is made on a US-Iran ceasefire agreement. Buoyed by the ceasefire news, international oil prices fell below $80 per barrel this week for the first time in three months, a notable drop from the previous high of around $108 per barrel. However, the sustainability of the ceasefire remains uncertain, keeping markets on alert regarding energy price trends.
On Hold, but with a Hawkish Tone
Bank of England Governor Andrew Bailey stated in the announcement that the recent fall in oil prices was "encouraging," but emphasized that geopolitical risks remain and the threat of high energy prices is not yet eliminated.
The MPC meeting minutes revealed that members unanimously agreed that if inflation were to rise further, "the appropriate policy response should be firm and forceful." The seven members who voted to hold rates warned of the risks of second-round effects but also stressed that "weak demand and a loosening in labour market conditions were likely to dampen the strength of second-round effects to some extent."
Regarding policy guidance, the committee maintained a neutral tone, stating it would "continue to monitor developments in the Middle East closely" and is "prepared to take whatever action is necessary to ensure CPI inflation returns to the 2% target in the medium term."
The Inflation-Growth Dilemma
The Bank of England currently faces a dilemma: inflation remains stubbornly high while the growth engine has clearly lost momentum.
The latest data shows the headline inflation rate at 2.8%, still comfortably above the central bank's 2% target. Yet, the real economy is showing signs of weakness—April GDP unexpectedly contracted by 0.1% month-on-month. Although the bank estimates underlying growth in the first quarter was around 0.2% and expects the second quarter to be broadly flat, signals of waning momentum cannot be ignored.
A loosening labour market has provided a key buffer for the Bank of England to pause rate hikes. The latest data indicates that since the outbreak of the geopolitical conflict in February this year, the UK has lost approximately 64,000 jobs in total. Growth in regular private sector pay has slowed to a five-year low. The MPC minutes explicitly noted this aligns with the overall trend of "a gradual loosening in the labour market," adding practical justification for keeping rates steady.
A Sharp Shift in Market Sentiment: Rate Cut Expectations Fade, Hike Bets Rise
Governor Bailey and external members such as Alan Taylor and Catherine Mann have described the Bank of England's current policy stance as "actively" holding rates steady, arguing that the overall tightening of financial conditions has, in effect, performed the MPC's tightening function.
The meeting minutes showed that most MPC members believe the tightening of financial conditions since the outbreak of the Middle East conflict has "provided some insurance against inflation risks," which was an important consideration in the committee's decision to pause.
Regarding market expectations, the landscape has shifted significantly within months. Before the US-Iran conflict erupted in February, markets widely anticipated the Bank of England would begin a rate-cutting cycle within the year. As of Thursday, market expectations have pivoted towards pricing in a rate hike.
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