Bank of England holds interest rates at 4.25 per cent
The Bank of England has held interest rates to “squeeze out persistent inflationary pressures” amid tensions between Israel and Iran risking an alarming uptick in energy prices later this year.
Officials said high inflation predictions and sticky wage growth figures had led them to opt for interest rates to be kept at 4.25 per cent while the emergence of a conflict in the Middle East had caused it to “remain vigilant”.
But three out of nine rate-setters – external members Swati Dhingra, Alan Taylor and deputy governor Dave Ramsden – voted for a 25 basis point cut, highlighting some of the tensions within the Monetary Policy Committee (MPC).
The Bank retained its “gradual and careful” approach to rate-cutting but it warned again the path was not “pre-set” given the Brent crude oil spot price had increased by 26 per cent since the May decision due to an escalating conflict in the Middle East.
“Interest rates remain on a gradual downward path, although we’ve left them on hold today,” said Andrew Bailey, Governor of the Bank of England.
“The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation.”
Inflation data released by the Office for National Statistics (ONS) on Wednesday morning showed prices rising by 3.4 per cent in the year to May, which came as taxes hit firms in the previous month and regulated energy bills spiked.
Minutes to the meeting commented on the MPC’s sensitivity to “elevated” global tensions putting the Bank’s interest rate-cutting cycle at risk of coming to an abrupt end.
“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainable to the two per cent target in the medium term have dissipated further,” the Bank’s published minutes said.
Interest rate cuts hinge on jobs data
The Federal Reserve last night voted to hold interest rates while the European Central Bank followed through on its ninth cut in two years after eurozone inflation pressures eased.
The Bank said the UK economy had suffered from greater “persistence” in inflation and wage growth than other economies, particularly in prices seen across services, as it stuck by May forecasts stating inflation could climb as high as 3.7 per cent in September.
The MPC also said the impact of President Trump’s tariffs could have a smaller effect on the UK economy than originally thought as fresh estimates suggest the effective tariff rate may have been reduced by over a third after a trade deal with China saw tit-for-tat taxes on imports come down.
Dovish rate-setters who voted for an interest rate cut pointed to evidence suggesting a collapse in the labour market and wage growth coming in lower than expected at 5.2 per cent in the three months to April.
But notes suggested economists at the central bank remain wary of labour market figures produced by the ONS, which last week showed a single month employment decline of 109,000 in May.
Policymakers said employment figures are often revised, although there was an admission that other surveys by the Recruitment and Employment Confederation and S&P Global “corroborated this pattern” of a loosening in the labour market.
The Bank also said it would also continue to monitor how Reeves’ tax hikes on employers feed through into inflation and jobs market data over the coming months.
Underlying growth has also remained at around zero despite a climb in headline GDP of 0.7 per cent in the first quarter, according to the Bank’s analysis, while consumers also were said to continue to fear high price growth this year due to instability in the UK economy.