Bank of England Holds Rates in 7-2 Vote as Oil Outlook Improves

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(Bloomberg) — The Bank of England held interest rates at 3.75% as it said the recent fall in oil prices was “encouraging,” even while two policymakers voted for an immediate quarter-point hike over concerns of persistent inflation. 

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External member Megan Greene joined April’s lone dissenter, Chief Economist Huw Pill, in voting for an immediate increase in bank rate to 4% citing the unstable outlook for prices despite the recent truce between the US and Iran.

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The committee left its guidance unchanged and lowered its estimate of peak inflation to 3.25% in the fourth quarter of this year, below the 3.6% it had projected in April. 

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“Oil prices have fallen in recent days and that’s encouraging,” Governor Andrew Bailey said in written remarks alongside the decision. In the paragraph reflecting his own views, he added that “the situation remains unpredictable and there is clearly a risk that energy prices remain elevated for an extended duration.”

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The pound held losses against the dollar, trading more than half a percent weaker at $1.3219, while traders marginally pared bets on hikes, fully pricing one quarter-point increase this year and around a 30% chance of a second.

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“We think the BOE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night,” said Luke Bartholomew, deputy chief economist at Aberdeen. “The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures.”

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The minutes showed the MPC agreed that the “appropriate policy response should be robust” if prices creep higher, as the seven who voted to hold warned about the risk of second-round effects.

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The BOE is trying to strike a balance between taming inflation, which at 2.8% is above the bank’s 2% target, and supporting growth amid elevated joblessness and weak GDP. The committee emphasized the “weakness in demand and the labor market was likely to lessen the strength of second-round effects.”

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Official data published just hours before the BOE’s announcement showed 64,000 jobs have been lost since the Iran war started in February, and regular private-sector pay growth has fallen to its weakest in five years. The MPC minutes said the latest jobs data was “consistent with a gradual loosening in the labour market.”

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Gross domestic product fell 0.1% in April, although the bank said it believed the underlying rate of growth was 0.2% in the first quarter and would remain at a similar level in the second.

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The truce between the US and Iran has allayed investors’ most pessimistic scenario for inflation, as oil this week dropped below $80 a barrel for the first time in three months, down from a peak of $108 a barrel. 

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However, with uncertainty surrounding the durability of the 60-day ceasefire, the BOE kept its neutral guidance that it would “continue to monitor closely the situation in the Middle East” and that “the committee stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”