Bank of England votes 6-3 to leave bank rate unchanged at 3.75%

The Bank of England on Thursday left interest rates unchanged in a split vote as it weighs the impact on inflation from the Middle East crisis.

The BoE's Monetary Policy Committee voted 6-3 to leave bank rate at 3.75%. The central bank has maintained rates in each of its five meetings this year, with the last change a quarter point cut to 3.75% in December.

BoE Chief Economist Huw Pill and Megan Greene continued to argue for a quarter point rate increase as they did at the June meeting. In July, they were joined by Catherine Mann.

In a statement, the BoE said the monetary policy stance required to achieve the 2% inflation target sustainably will depend on the scale and duration of the energy shock caused by the Middle East war, and how it propagates through the economy including via financial conditions.

The BoE noted inflation has fallen since its previous meeting, although it is expected to rise later this year as the effects of 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," the BoE stressed.

However, the central bank noted there is "little evidence so far" to suggest such effects.

Loose labour market conditions, and higher interest rates faced by households and businesses than prior to the conflict, will also act to reduce inflation over time, it said.

Nonetheless, the BoE judges that the risks to the inflation outlook are "tilted to the upside" relative to the central projection in the July Monetary Policy Report, but there remains scope for the outlook to change "materially" as events in the Middle East unfold.

The BoE said it stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.

All members of the MPC agreed that risks to the paths of energy prices remained skewed to the upside. And the MPC noted that monetary policy could need to react before the risks around inflation persistence materialise conclusively.

BoE Governor Andrew Bailey said holding bank rate is "appropriate" as global conditions look to be more uncertain and inflationary, while domestic conditions are on balance more benign as regards the prospects for inflation.

But Catherine Mann said a rate increase would reinforce policy "credibility", while Huw Pill said a rate rise would offer a "clear and unambiguous signal of our willingness and ability to address upside risks to inflation stemming from events in the Gulf. This would place us in the best position to manage risks to the inflation target as they emerge."

Sterling traded at USD1.3389 shortly after the decision compared to USD1.3393 before.

A press conference with Governor Bailey follows at 1230 BST.

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