The Bank of England kept its main interest rate unchanged at 3.75% on Thursday, as policymakers balanced the renewed risk of escalating tensions between the US and Iran against signs that domestic price pressures are cooling faster than anticipated.
Minutes from the meeting showed the Monetary Policy Committee voted 6-3 to hold the rate steady. Chief Economist Huw Pill and external members Megan Greene and Catherine Mann dissented, advocating for a 25-basis-point hike. At the June meeting, only Pill and Greene had supported an immediate move.
Following the decision, Governor Andrew Bailey told a press conference: "Please do not leave this room thinking that the Bank of England is gradually moving towards hiking rates. Because frankly, nothing I have said, and nothing I think anyone here has said, suggests that."
After Bailey's remarks, traders pared back bets on a rate increase at the September meeting, with the implied probability now sitting at just 35%. Markets now expect roughly 32 basis points of total tightening by year-end, down from the 42 basis points priced in on Wednesday.
The Bank maintained its policy guidance, stating the MPC "stands ready to act" if persistent high inflation requires it, thereby keeping its options open. The external environment remains highly unpredictable.
Just days before the decision, oil and gas prices had risen significantly above the average levels the Bank had assumed in its baseline forecast only ten days earlier. However, the MPC noted there are "clear signs" that domestic inflationary pressures are easing, and so far there is "little evidence" that the energy shock has pushed up wage demands or triggered price increases in other sectors.
Most of the members who voted to hold rates also indicated their strategy could shift if the conflict ends quickly. Two of those members said they would consider cutting rates in such a scenario.
Bailey added: "There is currently little evidence of second-round effects, though it is still too early to take comfort from that. The global environment looks more uncertain and more prone to pushing inflation higher, while the domestic picture is broadly more benign for the inflation outlook. Therefore, keeping Bank Rate unchanged is appropriate."
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