Following the decision made at its March meeting, the Bank of England left its interest rate unchanged at 3.75%. Money markets are increasingly pricing in a scenario of a more hawkish BoE policy. They have begun to fully price in a total of 50 basis points of rate hikes by the end of this year.
Voting results of the Monetary Policy Committee (MPC):
- No change: 9 (previously – 5)
- 25-basis-point cut: 0 (previously – 4)
- 50-basis-point cut: 0 (previously – 0)
- Increase: 0 (previously – 0)
Commentary on the decision:
The conflict in the Middle East has caused a significant increase in global energy and commodity prices, which will affect fuel and utility prices for households and have an indirect impact through the costs incurred by businesses. Previously, there had been a sustained downward trend in domestic prices and wages. In the near term, CPI inflation will rise as a result of this new economic shock.
Monetary policy cannot influence global energy prices, but it aims to ensure that the economy adjusts to them in a way that allows the 2% target to be achieved sustainably. The Monetary Policy Committee (MPC) notes the increased risk of domestic inflationary pressures resulting from second-round effects in wage and price-setting, with this risk growing the longer higher energy prices persist. The MPC also assesses the impact on inflation of a slowdown in economic activity, which is likely to result from higher energy costs.
The Committee will continue to closely monitor the situation in the Middle East and its impact on global energy supplies and energy prices. It stands ready to take the necessary measures to ensure that CPI inflation remains on track to reach the 2% target over the medium term.
Updated section of the forecasts:
The survey shows that in 2026, the average increase in base salaries will be 3.6% (previously: 3.4%). The bank estimates that CPI will be “around 3%” in the second quarter and “up to 3.5%” in the third quarter due to a global price shock in the energy market (previously: 2.1% in the second quarter).
The GBP/USD pair is rising in its initial reaction to the decision and accompanying comments. Source: xStation
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