The Bank of England has opted to keep its main interest rate at 3.75%, citing recent declines in oil prices as "encouraging," even as two policymakers dissented, voting for an immediate 25 basis point hike due to concerns over persistent inflation.
External member Megan Greene joined Chief Economist Huw Pill, who was the sole dissenter in April, in voting to raise the rate immediately to 4%. Their stance was based on the view that the inflation outlook remains uncertain, despite the recent ceasefire agreement between the US and Iran.
The Monetary Policy Committee (MPC) left its forward guidance unchanged and revised down its projection for the inflation peak in the fourth quarter of this year to 3.25%, lower than the 3.6% forecast in April.
"The oil price has fallen over recent days, which is encouraging," Governor Andrew Bailey said in written remarks accompanying the decision. In a section reflecting his personal view, he added that "the situation remains unpredictable, and there are clearly risks that energy prices could remain high for longer."
The meeting minutes indicated that the MPC was unanimous in its view that, should prices rise in a sustained manner, "the appropriate policy response would be forceful." The seven members who voted to hold rates warned of the risk of second-round effects on inflation.
The central bank is attempting to strike a balance between curbing inflation, which at 2.8% remains above its 2% target, and supporting growth amid elevated unemployment and weak GDP. The committee stressed that "slack in demand and the labour market is likely to dampen the strength of second-round effects."
Official data released hours before the Bank's announcement showed that 64,000 jobs have been lost since the outbreak of the Iran conflict in February, with private sector regular pay growth slowing to its weakest pace in five years. The MPC minutes noted that the latest employment data was "consistent with a gradual loosening in the labour market."
Gross domestic product fell by 0.1% in April, although the Bank stated it believes underlying growth was 0.2% in the first quarter and is likely to remain at a similar level in the second quarter.
The ceasefire between the US and Iran has alleviated investor fears of the most pessimistic inflation scenarios. Oil prices this week fell below $80 a barrel for the first time in three months, down from a peak of $108.
However, given uncertainty over the durability of the 60-day ceasefire, the Bank maintained a neutral guidance, stating it will "continue to monitor the situation in the Middle East closely" and that "the Committee stands ready to take action as necessary to ensure CPI inflation returns sustainably to the 2% target in the medium term."
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