Bank says “global uncertainty” behind interest rate decision

The Bank of England says that it will continue to monitor the conflict in the Middle East and its risk to the UK economy after deciding to maintain interest rates at the same level.   

Members of the Bank’s Monetary Policy Committee (MPC) voted by a majority of 6–3 to maintain Bank Rate at 4.25%.

Three members preferred to reduce Bank Rate by 0.25 percentage points, to 4%.

The Bank says that global uncertainty remains elevated, with energy prices having risen owing to an escalation of the conflict in the Middle East.

Philip Nothard, insight director at Cox Automotive, said: “While the Bank of England's decision to hold rates is understandable amongst evolving economic challenges, including the risk of rising oil prices, the pressure is being felt across the economy.

“Rising costs continue to be a challenge for both motorists and automotive businesses, and increasing oil costs will only exacerbate this.

“We have seen positive signals for the car finance industry, rebounding strongly in the first half of the year.

“While expecting rate reductions may be unrealistic, further rate reductions would help continue this rate of recovery and contribute significantly to building greater financial stability for the broader automotive sector." 

Underlying UK GDP growth appears to have remained weak, according to the MPC, and the labour market has continued to loosen, leading to clearer signs that a margin of slack has opened up over time.

Measures of pay growth have continued to moderate and, as in May, the MPC says it expects a significant slowing over the rest of the year and remains vigilant about the extent to which easing pay pressures will feed through to consumer price inflation.

With 12-month CPI inflation increasing to 3.4% in May from 2.6% in March, in line with expectations in the May report.   

The rise was largely due to a range of regulated prices and previous increases in energy prices. Consumer price inflation is expected to remain broadly at current rates throughout the remainder of the year before falling back towards target next year.

There remain two-sided risks to inflation, says the MPC. Given the outlook, and continued disinflation, it believes that a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.

It will continue to monitor the risks of inflation persistence and what the evidence may reveal about the balance between aggregate supply and demand in the economy.

It added that monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

David Morrison, senior market analyst at Trade Nation, said: “While further rate reductions have been signalled, most analysts now expect these to come later in the year, as the Bank weighs the need to support growth against its 2% inflation target. 

“Sterling fell sharply on the news. This reflects the fact that one more member of the MPC voted to cut rates than expected, thereby increasing the probability of another rate cut at the Bank’s next meeting in August. But there’s a lot of economic data due before then. So overall, investors will be wary of reading too much into this.”

Last month, the MPC voted by a slim majority of 5-4 to reduce the interest rate by 0.25 percentage points, to 4.25%.