Interest rates held as Bailey predicts higher prices

Interest rates have been held as policymakers at the Bank of England warned the war in Iran could send prices spiralling as soon as April. 

Members of the Monetary Policy Committee (MPC) left interest rates unchanged at 3.75 per cent, with guidance to cutting rates in upcoming meetings now being dropped altogether. 

Several policymakers, including governor Andrew Bailey, said they “stand ready to act” in a warning that could deepen fears of interest rates being hiked later this year. 

Governor Andrew Bailey said that policymakers’ focus had shifted towards concerns around higher oil and gas prices feeding through into rising household bills and business costs over the coming months. 

“War in the Middle East has pushed up global energy prices,” Bailey said. 

“You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year. 

“The best way to tackle this is at the source by re-opening energy supply lines. We have held interest rates at 3.75 per cent as we assess how events unfold.” 

Bailey added that the MPC’s main job was to bring inflation back to two per cent. The Bank of England chief’s warning is a far cry from the February meeting when he described revised forecasts on price growth as “good news”. 

Inflation forecasts undo Reeves’ measures

Inflation forecasts from April have now been revised up, undoing Rachel Reeves’ Budget measures that looked to strip costs from energy bills and ease price growth at a faster rate. 

Forecasters said that, as a result of an estimated 60 per cent rise in fuel prices, inflation was now expected to remain at three per cent in the second quarter of the year. Price growth was then expected to jump higher to 3.5 per cent, though predictions were subject to change pending any change in trade flows through the Strait of Hormuz. 

The Brent Crude oil price rose by eight per cent on Thursday to over $114 while gas prices surged on news that a key site in Qatar suffered “extensive damage” by Iranian strikes. 

Oil prices have soared by over 50 per cent since the start of the war while a European benchmark for gas prices has doubled. 

Treasury and Office for Budget Responsibility (OBR) officials use a rule of thumb to calculate the effects market changes can have on the UK economy. It suggests that a 20 per cent rise in energy prices contribute to an addition of around one percentage point rise in inflation while knocking GDP growth by 0.5 percentage points. 

Economists have warned that the effects of market prices depend on how long the war continues for. 

Rate-setters at the Bank suggested that households and businesses remained highly “sensitive” to inflationary shocks, which could feed through into more pessimistic expectations. 

They set a deadline of six weeks for evidence-gathering on the impact of the war, with a longer war leading to a “self-perpetuating behaviour in wage and price dynamics”. 

External member Swati Dhingra, who has tended to back faster interest rate cuts over the last year, suggested a longer war could “warrant” an increase in interest rates. Alan Taylor, who is also seen as a dovish MPC member, said there was a “high bar to hiking” rates. 

Chief economist Huw Pill said: “The potential for second-round effects following recent events in the Middle East remains substantial, justifying caution in monetary policy setting. 

“While financial conditions have tightened in recent weeks, whether this proves sufficient to contain potential upside risks to price stability stemming from energy prices is an open question.”