The Bank of England (BoE) surprised markets on Thursday with a unanimous 9-0 decision to keep interest rates at 3.75%. The decision reflected the central bank’s deep concern that a surge in oil and gas prices due to the Iran war could push UK inflation to 3.5% or higher in the near future.
Governor Andrew Bailey said that despite the weak growth in the British economy, the central bank’s priority was to prevent inflation from getting out of hand. He warned that soaring fuel prices would increase the burden of household living costs by the end of the year if the conflict in the Middle East does not subside.
The market reaction was seen with the value of the Pound Sterling strengthening against the Dollar and the Euro. Investors are now predicting that the BoE may have to make two rounds of quarter-point interest rate hikes this year to quell a resurgent inflation.
Within the MPC committee, a hawkish tone began to dominate the discussions. Members such as Catherine Mann and Huw Pill have signalled a willingness to raise interest rates if energy price pressures persist. This marks a major shift from expectations earlier in the year when many analysts had predicted a series of rate cuts.
Despite the weakest wage data since 2020, the BoE remains reluctant to ease its grip. The central bank will wait until its next meeting at the end of April to reassess the impact of the damage to Qatar’s gas infrastructure and the Iran war developments before making any further policy decisions.
