The Bank of England (BOE), the United Kingdom's Central Bank, said on the 30th (local time) that the Monetary Policy Committee (MPC) decided to hold the benchmark rate at 3.75% a year. It appears to be because the Middle East outlook is hard to predict due to the Iran war.
After lowering the benchmark Bank Rate from 4.0% to 3.75% in December last year, the BOE kept it on hold at all three Monetary Policy Committee meetings held this year.
Of the nine monetary policy committee members, eight favored holding rates, and one voted for a 0.25 percentage point (p) hike to 4%.
The consumer price index (CPI) inflation rate announced last week was 3.3%, well above the BOE's 2% target. Energy expenses, including motor fuel, pushed up inflation. There are widespread concerns that prices will continue to rise.
BOE Governor Andrew Bailey called the decision "reasonable given the difficulty of forecasting the economy and the situation in the Middle East," adding, "We will watch very closely the impact on the U.K. economy."
Before the Iran war broke out, many expected a rate cut within the year. The U.K. inflation rate was forecast to approach 2% by midyear, but sentiment flipped after the war.
The BOE also said in a statement, "The outlook for global energy prices is highly uncertain due to the Middle East conflict," adding, "While currency policy cannot affect energy prices, it will be set so that the economy adjusts in a way that can sustainably achieve the 2% target." It also said, "We are prepared to take necessary actions to keep the CPI inflation rate on track to meet the 2% target."
The BOE said, "The necessary policy stance will depend on the size and duration of the (energy price) shock and its spillover effects on the broader economy," and presented three scenarios that could unfold in the U.K. economy.
Among them, the "Scenario A" assumes energy prices follow the futures market path. A restrictive currency policy stance was expected to be needed.
"Scenario B" assumes that even if energy prices are high and change persistently, the second-round effects spilling over to other institutional sectors are not large. Under this, the inflation rate is expected to rise to as high as 3.7% by year-end. A majority of Commissioners viewed this as the most likely scenario.
"Scenario C" assumes energy prices remain elevated for a prolonged period and second-round effects also appear. Under this, the CPI inflation rate could rise to as high as 6.2% early next year. The BOE projected that strong currency tightening would be needed in this case.
Governor Bailey said, "We are placing the greatest weight on Scenario B, in which second-round effects are somewhat reduced," but added, "We are also placing some weight on Scenario C, which would call for a stronger currency policy response."