- Bank of England’s MPC voted 6-3 to hold interest rates at 3.75% for the fifth time in a row
- Whilst inflation in June fell to 2.6% the fluctuating price of oil and gas is expected to impact prices in the second half of the year
- The Bank believes inflation could now peak at 3.2% in the autumn
Danni Hewson, AJ Bell head of financial analysis, comments on the latest Bank of England interest rates decision:
“Bank of England rate setters are as much in the dark as any of us are when it comes to the complicated situation in the Middle East.
“Every day seems to bring another twist to the plot which has resulted in vacillating oil prices, with a spread between $118 and $71 a barrel for Brent crude, experienced between the start of the Iran war and today.
“Add in fluctuating gas prices, question marks over shipping routes and you have a geoeconomic backdrop which feels more like a game of snakes and ladders than reliable data on which to base hugely significant domestic decisions.
“There is little doubt that the situation has improved significantly from the worst-case scenario the Bank first outlined back in April. Today the worst case sees inflation peaking at 3.2% in October and November before edging back, but the Bank’s 2% target is not expected to be met for another three years.
“The uncertainty, the expectation that higher than desirable inflation will linger for longer and concern that second round effects could take hold in the interim, were all cited as reasons for a proactive hike by three members of the MPC.
“It’s significant that at each of the past three meetings another member has made the jump from the hold to hike side of the table. Whilst there is an argument to be made that the market is doing much of the heavy lifting without the need of intervention from the Bank of England, making it clear the Bank stands ready to act in itself sends a signal, though that stance could become more challenging the longer uncertainty persists.
“And there are plenty of economic reasons to continue to hold rates where they are. Whilst the economy has proved more resilient than many had feared, the 1.1% growth the Bank now forecasts for this year isn’t exactly a cracking result.
“The labour market is creaking, and young people in particular are struggling to find work. Wage growth has also remained subdued and that should limit those second-round effects the Bank will be mindful of allowing to take hold.
“Looking ahead there’s certainly a feeling that rates could stay in limbo for the rest of the year, but today’s vote shows that rate setters are acutely sensitive to the sheer unpredictability of the current climate and a lot could change before we get to the September meeting.”
