The Bank of England has held interest rates steady at 3.75% as inflationary pressures intensify amid the Iran war.
The Monetary Policy Committee voted by a majority of 8-1 to maintain the bank rate. One member voted to increase the rate by 0.25% to 4%.
The Committee said conflict in the Middle East means that prospects for global energy prices are highly uncertain. The price of Brent crude reached a four year high of $126 a barrel on Thursday following reports the US may resume attacks on Iran.
The decision to maintain interest rates at their current level follows a larger-than-anticipated rise in inflation to 3.3% in March, up from 3% in February, as a result of higher fuel prices. The Bank of England warned that inflation is likely to be higher later this year as the effects of higher energy prices pass through.
Rob Morgan, chief investment analyst at Charles Stanley, said: “The deepening Middle East crisis has dramatically shifted the inflationary outlook, and officials have understandably retreated to their ‘wait-and-see’ shells until the fog clears.
“The base case even for the optimists is inflation stuck in a zone around 3% this year rather than gradually falling to the 2% target as previously anticipated. That means second-round effects could loom large and interest rates are firmly off the table until there is greater visibility of the extent of the lasting mark.
“The UK is acutely sensitive to energy and import costs, and any move to cut rates would likely be met by weakness in the pound, worsening the domestic price picture. Equally, policymakers are disinclined to increase bank rate as things stand. It is already in restrictive territory in the context of a fragile economy, and any move higher would further weigh on growth. There’s also the possibility the situation may resolve itself and any pre-emptive action prove unnecessary.
“Overall, it means a holding pattern for rates until there is more clarity.”
Neil Wilson, investor content strategist at Saxo UK, commented: “The Bank of England ought to look through this temporary supply shock and wait a while longer before it thinks about raising rates. While inflation has ticked up due to motor fuel prices, we need more time to see the impact on broader inflation.”
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