The Bank of England and the European Central Bank have both announced their decisions to maintain current interest rates.
On the evening of April 30, the Bank of England's Monetary Policy Committee voted 8-1 to keep the policy rate at 3.75%. Following the announcement, the British pound strengthened against the US dollar.
The Bank of England stated that the conflict in the Middle East has created significant uncertainty regarding global energy prices. While monetary policy cannot directly influence energy costs, policy decisions will aim to ensure the economy adjusts in a way that sustainably achieves the 2% inflation target. The necessary policy stance depends on the scale and duration of the shock and its transmission effects throughout the economy.
Consumer price inflation has risen to 3.3% and may increase further later this year due to the pass-through of higher energy prices. There is a significant risk of second-round effects impacting corporate pricing and wage-setting, which policy must work to restrain. However, a continued loosening in the labor market and weaker economic growth may help curb inflationary pressures. Financial conditions have tightened since the conflict began, which should gradually contribute to bringing inflation down. Considering all risks to the economic outlook, the Committee judged that maintaining the current policy rate at this meeting was appropriate.
The Monetary Policy Committee noted that, compared to the previous energy shock in 2022, the current shock begins from a position of lower inflation, weaker demand, a looser labor market, and tighter monetary policy. Wage growth is gradually declining towards levels consistent with the inflation target, and most private-sector wage agreements for 2026 were largely settled before the shock occurred. These factors are expected to limit wage inflation this year, providing time to observe further economic evidence.
Looking ahead, the Bank of England stated that the Committee will continue to monitor the situation in the Middle East and its economic transmission effects closely. It stands ready to take necessary action to ensure CPI inflation returns sustainably to the 2% target in the medium term.
Previously, markets had expected multiple rate cuts from the Bank of England in 2026. However, following the outbreak of conflict in the Middle East, expectations shifted towards potential rate hikes. After the latest decision, traders maintained their bets on future rate increases, pricing in a cumulative 73 basis points of tightening for 2026.
Separately, the European Central Bank's Governing Council also decided to keep its three key interest rates unchanged. The deposit facility rate remains at 2.00%, the main refinancing operations rate at 2.15%, and the marginal lending facility rate at 2.40%. Following this announcement, the euro also strengthened against the US dollar.
The ECB stated that while recent information is broadly consistent with its previous assessment of the inflation outlook, both upside risks to inflation and downside risks to economic growth have intensified. The Governing Council is committed to setting monetary policy to ensure inflation stabilizes at the 2% target over the medium term.
The ECB noted directly that geopolitical conflict in the Middle East has led to a sharp rise in energy prices, boosting inflation and weighing on economic confidence. The impact on medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock, as well as the scale of its indirect and second-round effects. The longer the conflict persists and the longer energy prices remain elevated, the greater the potential impact on broader inflation and the economy.
The ECB affirmed that the Governing Council is fully prepared to address the current uncertainties. The euro area is facing this energy price surge with inflation close to the 2% target and an economy that has shown resilience in recent quarters. Although short-term inflation expectations have risen significantly, longer-term expectations remain firmly anchored.
Looking forward, the ECB stated that its future interest rate decisions will be based on its assessment of the inflation outlook and associated risks, taking into account incoming economic and financial data, underlying inflation dynamics, and the effectiveness of monetary policy transmission. It will not pre-commit to a specific rate path.
The ECB's decision was in line with market expectations. Economists widely believe that the June meeting is the key event to watch, as the central bank may then raise rates by 25 basis points, lifting its key rate to 2.25%.
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