The Bank of England has held the Bank Rate at 3.75%, keeping borrowing costs at their current level for a fourth consecutive meeting.
The Monetary Policy Committee voted by seven to two to leave rates unchanged, while at the same time lowering its forecast for inflation later this year. The Bank now expects inflation to peak at around 3.25%, down from the 3.6% it forecasted in April.
Announcing the committee’s decision, Governor Andrew Bailey said recent falls in oil prices were “encouraging”.
However, he warned: “Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline.
“The Bank’s job is to make sure that doesn’t turn into sustained inflation above our 2% target.”
Changing outlook
The outlook, though, has changed markedly.
The European Central Bank only recently became the first G7 central bank to raise interest rates, increasing borrowing costs by 0.25 percentage points to 2.25%. Its policymakers warned that higher energy costs linked to the conflict involving Iran could drive inflation higher and weigh on economic growth.
The move added considerable pressure on the Bank of England to raise its own rate ahead of its June meeting.
But in the space of a week, it was revealed that UK inflation had held steady at 2.8% in May, surprising the markets after economists had forecast a rise to 3%.
US-Iran agreement
Shortly after, the Americans and the Iranians finally came to an agreement to reopen the Strait of Hormuz. It’s a key route for global oil and gas supplies, and its reopening has eased concerns over energy costs.
Oil prices have since fallen, with Brent crude now trading around $77 per barrel from earlier highs of $120, reducing fears that disruption to energy supplies could trigger a fresh inflation shock.
While the Bank acknowledged that energy prices are still above pre-conflict levels and could still feed through into the wider economy, it now expects inflation to be lower than previously forecast by the end of the year.
Mixed economic backdrop
There is still, however, a very mixed economic backdrop. The UK economy contracted by 0.1% in April, and the labour market has shown signs of weakening, although these are factors that economists claim will reduce the likelihood of any increase in borrowing costs.
The mortgage industry has broadly welcomed the news, with lower-than-expected inflation and easing energy costs raising hopes that pressure on mortgage pricing will continue to ease. Some lenders have already started cutting rates, while competition for business is expected to intensify during the second half of the year.
