Bank of England leaves rates on hold, inflation risks tilted to upside

The Bank of England on Thursday left interest rates unchanged but warned the risks to the inflation outlook have tilted to the upside since its last meeting in July.

The BoE's Monetary Policy Committee voted 6-3 to leave the bank rate at 3.75%, where it has been since last December. The decision and vote split was in line with FXStreet consensus.

Huw Pill, Megan Greene and Catherine Mann voted for a 25 basis point hike, as they did at July's MPC meeting.

They believe that a "proactive increase in bank rate would help anchor inflation expectations," the MPC's statement said.

BoE Governor Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor preferred to maintain the bank rate at 3.75%.

Bailey said: "There continues to be very limited evidence of emerging second-round effect though it is still early days."

But he warned that if the conflict in the Middle East "persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten."

In its statement, the MPC said monetary policy is being set to ensure inflation comes down to 2% sustainably as the economy adjusts to the energy shock caused by the Middle East war.

"The policy stance required to achieve this will depend on the scale and duration of the shock and how it propagates through the economy," it added.

The MPC said there has been little evidence so far of material second-round effects in price and wage-setting, but it cautioned that the risk of such effects, "against which policy needs to lean", is greater the longer higher energy prices persist or are more volatile.

"Overall, the Committee judges that the risks to the inflation outlook are tilted to the upside, and more so than at the time of the July Monetary Policy Report, although there remains scope for the outlook to change materially as events in the Middle East unfold," it added.

In addition, the MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, to zero.

This will be conducted through a multi-year plan, such that the remaining stock is unwound at an annual average pace of £46 billion by the end of 2034, through annual sales of £20 billion alongside maturing gilts.

Shortly after the decision, the pound traded at USD1.3361 compared to USD1.3404 before the announcement. The FTSE was up 71 points versus 22 points, and the yield on 10-year gilts was 5.24% against 5.30%.

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