BoE holds rates at 3.75%

The Bank of England today (April 30) held rates at 3.75% in an 8–1 decision.

In the minutes of the monetary policy committee (MPC) meeting, governor Andrew Bailey said the inflationary shock resulting from the Iran war differed from the one that had followed Russia’s full-scale invasion of Ukraine in 2022. “The increase in energy prices has been smaller, monetary policy more restrictive and the labour market is weaker,” he said. 

During today’s post-decision press conference, Bailey said higher energy prices could weigh further on demand and thus temper inflation. However, he added that it would be “a mistake to wait to see second round effects before acting”, and stressed the importance of the BoE agents’ research in helping to determine the best approach. 

In the minutes, the MPC set out three scenarios for the UK economy, all of which were conditioned on the market-implied path for the bank rate in the 15 days to April 22. This path is around 60 basis points higher on average than the one used in the BoE’s February report, and projects two rate hikes this year and the bank rate rising to a peak of 4.2% in 2027.

Catherine Mann, an external member of the MPC, said in the minutes that the market-implied path for the bank rate had increased since the start of the Iran conflict in late February. The war had, in and of itself, caused “tightening financial conditions”, she added.

In every scenario, the BoE’s near-term inflation forecasts were significantly higher than those made in February, and higher than the projections the bank had previously made up until 2028.

Scenario A assumes oil and gas prices will follow the paths implied by futures curves and that there will be no second-round effects from the current shock. Inflation would still rise to 3.6% at the end of 2026 and drop down below target to 1.5% in 2028 under this scenario.

In scenario B, energy prices would peak at similar levels to those in scenario A but remain higher over the rest of the forecast period. Inflation would peak at 3.7% at the end of 2026, before falling to 3% in 2027 and then reaching the bank’s 2% target in Q1 2028.  

Scenario C assumes energy prices will rise sharply and remain elevated for a prolonged period, with wage growth rising and staying significantly higher than under scenarios A and B. This would cause inflation to peak at 6.2% in Q1 2027 and still be above target at 2.6% in Q1 2029.

In the minutes, Bailey placed the most weight on scenario B. However, he also put “some weight” on scenario C, which he said “would require a stronger monetary policy response”. Whether the latter scenario came to pass would depend on the “size and persistence” of the energy shock, he added.

Clare Lombardelli, the BoE’s deputy governor for monetary policy, also felt scenario B was the most likely to transpire and said “a tightening in monetary and financial conditions relative to before the war” would be warranted. Likewise, the deputy governor for financial stability, Sarah Breeden, said that in contrast to 2022, slack in the labour market should put a “meaningful restraint” on inflation, particularly given the weak levels of demand.

If the situation were to worsen, this may warrant some tightening

Swati Dhingra, Bank of England MPC

The sole dissenter at the MPC meeting was Huw Pill, who favoured a hike to 4%. The BoE’s chief economist said in the minutes that he saw “the risk of second-round effects in each of these scenarios as skewed to the upside”. He added that he was “already concerned about a stalling of the underlying disinflation process even before the latest energy price shock”.

Megan Greene agreed with Pill, even though she had voted to hold. The external MPC member said in the minutes that even before the Iran war she had been concerned that the committee’s stance was not “meaningfully restrictive”, and said a rate rise “may be necessary in upcoming meetings”. In her view, even if the conflict ended soon, the risks to inflation were to the upside, given the size of the shock and the extent of the damage to infrastructure. 

Dave Ramsden, the deputy governor for markets and banking, placed equal weight on scenarios A and B, though he did not completely rule out C and would consider hiking rates under B. 

External MPC member Swati Dhingra gave equal weight to all three scenarios. In the minutes, she said that “if the situation were to worsen, this may warrant some tightening”, but that there was a limit to what would be an “acceptable” trade-off with output. 

Mann argued that all three scenarios overestimated both the projected opening up of slack and the moderation of inflation. “Should I see continued rising inflation… and expectations, I would expect to increase [the] bank rate so as to lean against inflation rising into 2027,” she said.

“Given neutral at 3%, it makes sense to hold,” said Alan Taylor – an assessment that Ramsden clarified during the press conference was the external MPC member’s personal view. 

“Tighter fiscal conditions since the conflict began are amply restrictive to provide insurance against inflation risks” if faced with B, or the more extreme C scenario, Taylor added in the minutes.