The Bank of England (BoE) kept the United Kingdom’s (UK) benchmark interest rate unchanged at 3.75% on Thursday. The decision was taken as MPC members tried to balance the need to contain current inflation risks while facing a lackluster domestic economic outlook.
The decision was supported by seven of the nine members of the Monetary Policy Committee (MPC) at its May meeting, in line with LSEG analysts’ expectations. However, chief economist Huw Pill and external member Megan Greene opposed it, calling for a 25 basis point rate hike to 4.0%.
The UK economy as a net energy importer is reportedly vulnerable to price shocks following the implications of the US-Iran war. Although May inflation data eased to 2.8%, the BoE expects commodity prices to rebound after the regulatory energy price cap is set to jump 13% this summer.
The BoE’s wait-and-see move contrasts with the aggressive actions of other major global central banks. Last week, the European Central Bank (ECB) raised interest rates in response to the energy crisis, followed by the Bank of Japan (BoJ) which raised borrowing costs to a 31-year high of 1.0%.
While futures markets were expecting a BoE rate hike by the end of the year, the latest developments in the 14-point MoU between President Donald Trump and President Masoud Pezeshkian have brought positive sentiment. The reopening of the Strait of Hormuz is expected to ease pressure on the global oil supply chain and curb the risk of further inflation.
