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The Bank of England has kept interest rates at 3.75 percent, but has indicated they may have to rise if the energy shock in Iran continues to batter the global economy and fuels inflation in Britain.
The Monetary Policy Committee voted eight to one to leave the British central bank’s policy rate unchanged for the third time in a row.
Huw Pill, the BoE’s chief economist, backed an immediate quarter-point rate hike to limit “upside risks to price stability”, according to minutes of the meeting published on Thursday.
The BoE was forced to abandon its previous plans to further cut rates in March as US-Israeli attacks on Iran prompted the effective closure of the Strait of Hormuz and sent oil prices soaring.
With oil prices surpassing $125 a barrel at one point on Thursday, central bankers have become increasingly concerned that the prolonged disruption to energy supplies will lead to broader wage and price-setting.
After the meeting, Andrew Bailey, governor of the BoE, said keeping interest rates at 3.75 percent was a “reasonable position given the state of the economy and the unpredictability of events in the Middle East.”
He struck a forgiving tone at a news conference, telling reporters that the BoE was not trying to send a “clandestine” message that rates would rise. Different paths lay ahead depending on how the energy shock developed, he said. Some of these would necessitate interest rate increases and some would allow policy to remain unchanged.
He added: “We will continue to closely monitor the situation and its impact on the UK economy. Whatever happens, our job is to ensure that inflation returns to the 2 percent target after the initial impact of the war on energy prices has passed.”
The probability of a quarter-point rate hike at the MPC’s next meeting in June fell from about 70 percent before the decision, according to the probability implied in derivatives contracts, to roughly 50 percent.
Yields on two-year government bonds, which are sensitive to interest rate expectations, fell 0.12 percentage points to 4.47 percent, encouraged by falling oil prices. Yields move inversely to prices.
The mildly dovish market reaction will have come as a relief to Bailey after he was forced to play down the prospect of multiple rate hikes following the BoE’s March meeting.
But minutes from the April meeting showed a sharply divided MPC, with some members saying they would like to “act early” to prevent inflation from spiraling out of control, while others waited for more convincing evidence of inflation dangers before changing policy.
While Pill was the only dissenter, other MPC members stressed they were prepared to vote for rate hikes if necessary.
External member Megan Greene warned that an increase “may be necessary” in the coming meetings, while fellow external member Catherine Mann said she expected increases if inflation rates and expectations continued to rise.
According to official data, inflation accelerated to 3.3 percent in March, driven by a sharp increase in gasoline prices.
Given the uncertainty about the prospects for the conflict in the Middle East, the BoE has abandoned its usual central forecast and drawn up three scenarios for how the impact of the war could play out.
The middle scenario, Scenario B, points to “higher and more persistent” energy costs and implies that at least two rate hikes may be needed in the coming year to bring inflation back to target levels.
However, Bailey suggested that tightening in financial markets ahead of the March BoE meeting could be enough to keep inflation in check.
Additional reporting by Ian Smith in London
