Bank of England leaves rates on hold at 3.75%

(Sharecast News) - The Bank of England left interest rates on hold on Thursday, as widely predicted. The Monetary Policy Committee voted to leave the cost of borrowing unchanged at 3.75% by a majority of 7-2. Hawks Megan Greene and Huw Pill, the bank's chief economist, both backed a hike, to 4%.

The rate-setting body acknowledged that global energy prices had fallen, but argued that they remained both high and volatile. "The impact of the energy shock on the UK economy remains uncertain," it added.

The US-Iran war closed the vital Strait of Hormuz, through which around 20% of the world's oil supply is normally transported, and sent energy costs soaring, reigniting inflation fears and weighing on sentiment.

In response, the BoE - which had been expected pre-war to trim Bank Rate this year - left rates on hold, and made it clear it stood ready to tackle any upswing in inflation.

However, economic data published earlier this week showed inflation held steady at 2.8% last month. Although above the BoE's long-term 2% target, it has yet to spike as feared.

The US and Iran have also this week signed a 60-day memorandum of understanding, which will see the Strait of Hormuz reopen and hostilities end as negotiations for a long-term deal get underway. Oil prices have fallen sharply in response.

The MPC still expects inflation to rise later this year, as the effects of higher energy prices continue to pass through, and warned: "The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist."

However, it continued: "But the labour market continues to loosen and signs of a weakening economy could contain inflationary pressures.

"Interest rates faced by households and businesses remain higher than prior to the conflict, which will act to reduce inflation over time."

In the minutes accompanying the release, the MPC noted that Greene and Pill were "less confident in the pace of the underlying disinflation pre-conflict".

Neil Wilson, UK investor strategist at Saxo, said: "The market has been slow to reprice for a more dovish BoE but it's getting there, as the reasons not to hike are stacking up."

Alpesh Paleja, deputy chief economist at the Confederation of British Industry, said: "With uncertainty remaining high and inflation still expected to rise, rates are likely to stay on hold for some time yet. Nonetheless, the US-Iran deal reduces the risk of the MPC's more severe inflation scenario playing out.

"This makes a renewed rise in rates much less likely, even though some of the Committee's more hawkish members might need more reassurance."