Following an inflation flatline earlier this week, the Bank of England’s Monetary Policy Committee (MPC) opted to hold interest rates at 3.75% in a 7-2 vote.
The two dissenters opted to increase rates to 4%.
Commenting on the decision, the MPC noted that although global energy prices have fallen following recent events in the Middle East, they remain higher than pre-conflict and remain volatile.
CPI inflation came in at 2.8%, although the MPC noted this was expected to rise later this year as higher energy prices continue to pass through.
“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.
“But the labour market continues to loosen, and signs of a weakening economy could contain inflationary pressures,” the MPC said.
Ed Hutchings, head of rates at Aviva Investors, said: “Today’s BoE decision to keep interest rates unchanged was fully expected, but going forward, it’s clear that a lot of uncertainty amongst MPC members remains.
“However, make no mistake about it, the Committee will certainly act if they feel the need and particularly so, if inflation begins creeping higher and critically inflation expectations too.”
Susannah Streeter, chief investment strategist at the Wealth Club, said: “Policymakers are playing a game of patience, slowly shuffling their latest cards of data and taking time to deliberate where inflation will land next.”
The peace deal in the Middle East and resulting decline in energy prices means most of the committee felt little urgency for sharp policy moves, although there was still some dissent, she explained.
“Another interest rate hike is still being pencilled in on financial markets, but forecasts of multiple rate hikes have been reined back.
“Policymakers are staying cautious, anxious not to tip the economy into reverse but remaining wary about keeping a lid on unruly inflation.”
Lindsay James, investment strategist at Quilter, said that inflation could jump closer to 4% this year, while still higher oil prices might make the BoE nervous to cut rates despite poor growth and labour markets.
“Furthermore, members acknowledged that a weaker labour market reduced the chances of the recent bout of inflation leading to higher wage demands; some felt that households are more aware than ever of how one has led to the other in recent years – a case of once burnt, twice shy.
“Should we see Burnham win and a leadership contest that results in a lurch to the left, the growth hurdles facing the UK may become increasingly harder to clear and thus make the BoE’s job even more difficult than it already is today,” the Quilter strategist added.
See also: Inflation flatline takes Bank of England rate rise off the table
