Interest rates set to be held as inflation to remain ‘elevated’ despite Iran peace deal
Interest rates are expected to be left unchanged as Bank of England policymakers wait to find out whether the Iran war peace deal holds up.
The Bank’s Monetary Policy Committee (MPC) is set to keep interest rates at 3.75 per cent at a decision later this week.
Its decision would suggest that the Bank is still attempting to get clearer evidence on the impact of the Iran war on UK inflation, and whether the Strait of Hormuz can fully re-open for ships carrying crude oil and other key materials such as fertiliser.
On news of a peace agreement being struck between the US and Iran, short-term gilt yields dropped by slightly more than six basis points. Cooling UK government bond yields reflect investors’ growing optimism that interest rates may not rise as high as previously thought.
Two-year gilt yields were now at 4.17 per cent, which still represents a prediction of at least one interest rate hike from the Bank.
The Bank’s meeting will also follow the release of the inflation reading for May. Economists expect CPI inflation to rise to three per cent after last month’s reading came in at 2.8 per cent.
Deutsche Bank’s Sanjay Raja said the energy price shock from the Iran war would “keep price momentum elevated for longer”. Economists are now expected to revise economic forecasts for later this year off the back of President Trump’s announcement of a peace deal being struck.
Goldman Sachs’ James Moberly said that a rise in food inflation could force prices to jump higher than three per cent in the reading for May.
Bank officials are set to keep a close eye on services inflation before coming to a decision on interest rates given it could provide some indication of wage pressures.
Pay growth figures are set to be published on Thursday after Bank officials will have already cast votes on interest rates. Average earnings in the three months to April is expected to come in at 3.3 per cent when bonuses are excluded, or four per cent when bonuses are factored in.
Interest rates decision to be split
Barclays economist Jack Meaning said he expected two MPC policymakers to back a hike on interest rates to four per cent. The two hawks would be chief economist Huw Pill and Megan Greene, Meaning predicted.
He added that deputy governor Clare Lombardelli and external member Catherine Mann would be the next likeliest policymakers to join the pair in voting for interest rates to be hiked.
Investec economist Philip Shaw agreed with Meaning’s prediction, adding that there could be a rise in interest rates “further ahead”.
“Of course this is subject to how events in the Gulf unfold and also how oil and other energy markets react over the medium-term,” Shaw said.
He added, though, that the “mood music has become more positive” and did not predict any interest rate hikes to occur this year.