Bank of England Holds Rates as Officials Consider Hikes Ahead

Commuters pass the Bank of England. Photographer: Jason Alden/Bloomberg Photo by Jason Alden /Bloomberg

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(Bloomberg) — The Bank of England kept interest rates on hold with several policymakers saying they might consider future hikes, just as oil prices soared within reach of the central bank’s most pessimistic scenario for the economy.

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The Monetary Policy Committee voted 8-1 in favor of leaving the benchmark rate at 3.75%, minutes from its latest meeting said on Thursday. Chief Economist Huw Pill was the sole dissenting voice on the panel but others signaled they could join him at upcoming meetings.

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Governor Andrew Bailey said holding rates was a “reasonable place” to be given softness in the UK economy but signaled they may need to rise in the event of continued substantial disruption to energy supplies.

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Gilts extended gains after the decision. The two-year yield, which tracks the central bank rate closely, fell as much as six basis points to 4.49%. The pound was little changed against the euro at 0.8664.

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Because of the high degree of unpredictability stemming from the conflict in Iran, the bank scrapped its central inflation projection, instead laying out three scenarios based on different paths for energy prices and second-round inflation effects. 

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All three suggested that rates will need to rise, with the worst envisaging oil prices staying near $130 per barrel – a level oil markets came in sight of on Thursday morning ahead of the decision. Under that outcome, modeling used to show the possible effect on monetary policy pointed to rates needing to rise more sharply, by between 66 to 151 basis points.

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Several policymakers suggested that rates could soon rise if energy prices do not quickly come down. Deputy Governors Dave Ramsden and Clare Lombardelli, and external members Megan Greene and Catherine Mann all signaled financial conditions may need to be tightened.

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Still, the MPC noted that the tightening in financial conditions since the Iran war broke out, a subdued economy and weakening labor market will help constrain inflation. The panel stuck with language signaling it “stands ready to act” if more concerning evidence on inflation emerges. 

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The decision showed the UK central bank waiting for further clarity on the endgame of the Iran war, with the conflict dragging into a third month and the US and the Islamic Republic still at an impasse. 

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The BOE underlined that the prospects for global energy prices are “highly uncertain,” pointing to a risk of “material” second-round effects in pricing. The volatility in energy markets was laid bare by oil prices soaring to a wartime high ahead of the MPC decision, after Axios reported that US President Donald Trump was set to receive a briefing on new military options for action in Iran.

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Several rate-setters pointed to their middle scenario as the most likely, including Bailey. This shows inflation peaking at 3.7% by the end of the year with some modest second-round effects. The third and most downbeat outcome shows inflation hitting a high of 6.2% in early 2027 and remaining above the BOE’s 2% target throughout the forecast period. The Governor said he places “some weight” on this outcome.