The Bank of England has kept the UK’s main interest rate unchanged at 3.75 per cent even though inflation in the United Kingdom has risen to a five-month high as the fallout from the Iran war continues to ratchet up fuel prices.
The decision was widely anticipated, with six members of the Monetary Policy Committee voting to keep rates unchanged, while three backed a quarter-point increase to four per cent.
Though borrowing rates were kept on hold, financial markets think it’s more likely than not that the bank will back an increase at one of the next two policy meetings, either in November or December.
“So far higher global energy costs have had a limited effect on price and wage setting in the UK,” bank governor Andrew Bailey said on Thursday.
“But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise the bank rate to ensure that inflation falls back to our two per cent target.”
Like other central banks, the inflation outlook will be key.
Some have already decided to start raising borrowing costs again, including the US Federal Reserve on Wednesday.
The minutes accompanying the Bank of England’s decision showed that inflation is now expected to rise to about four per cent in the first quarter of next year from the current 3.1 per cent as households face another increase in their domestic energy bills.
That would take inflation further above the bank’s target rate of 2 per cent.
Interest rates in the UK had been trending downward from a 15-year high of 5.25 per cent until the US and Israel attacked Iran in late February.
The Iran war led to sharp increases in oil and gas prices, partly because the crucial Strait of Hormuz has been largely closed to traffic ever since.
As well as affecting the cost of personal loans and mortgages, the uptick in interest rate expectations is a growing problem for the British government as the servicing of its debt accounts for a higher proportion of its spending.
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