The Bank of England has held its interest rate at 3.75% – for the fourth time in a row.
it said the recent fall in oil prices was “encouraging,” even while two policymakers voted for an immediate quarter-point hike over concerns of persistent inflation
Dr Tony Syme, macroeconomic expert at the University of Salford, comments:“For the fourth time in a row, the Bank of England has held interest rates at 3.75%, and for once that is the right call.
“Two of the nine members of the Monetary Policy Committee, Huw Pill and now Megan Greene, voted to raise rates, double the number who broke ranks in the spring. Neither is predicting that energy prices will surge from here and both note the ceasefire in the Gulf. Their worry is subtler. They fear the energy shock will leave a lasting imprint on domestic inflation, feeding into wages, prices and the public’s expectations of where it will settle, and would raise rates now as insurance. But that is a bet on a risk, not a reading of the data. Inflation has held steady at 2.8%, undershooting the forecasts, with easing food prices doing much of the work. The second-round effects they fear are not yet showing up. The figures point the other way.
“The Bank is not alone. Only yesterday the US Federal Reserve also held steady, while signalling that its next move could be upwards later this year. Tellingly, the Fed pinned stubborn inflation on energy “supply shocks,” putting its finger on the real risk to the outlook.
“That risk is supply-side and international: oil and gas prices set far beyond these shores. The immediate threat is already easing, with an initial deal to reopen the Strait of Hormuz now signed. But it was never a risk that interest rates could address. The Bank Rate is a domestic, demand-side tool. Raising it would do nothing to lower the price of a barrel of oil.
“We have been here before. In 2022 it was the war in Ukraine; today it is the Middle East. On both occasions the pressure on prices came through energy, not an overheating economy. With growth weak and budgets stretched, a rate rise now would deepen the pain while leaving the cause untouched. Holding was wise. Hiking would have been a mistake.”
