Bank of England Set to Hold Rates at 3.75% as Iran Deal Sends Brent Down 5%

Q: With inflation set to surge, is the Bank of England's divided vote a sign of caution or a major policy error?

It looks more like caution than a major policy error, though the risk of a mistake is real if energy-driven inflation starts feeding into wages and broader prices. The case for holding rates is strong. The Bank Rate is already restrictive at 3.75 per cent, the labour market is weakening, vacancies are at their lowest since 2021, and growth has turned patchy after a solid first quarter. Governor Andrew Bailey and most MPC members argue that this is mainly an external energy shock, not a demand boom, and higher rates cannot stop oil or gas prices rising. They also note that financial conditions have already tightened as markets priced in a tougher outlook, which should help cool activity and inflation over time. That said, the hawks are not crying wolf. Huw Pill voted for an immediate rise, and Megan Greene and Catherine Mann have both warned that persistent energy costs could trigger “second-round” effects. Inflation expectations have risen sharply, with the Citi/YouGov one-year measure at 5.4 per cent in March, and the Ofgem price cap is due to jump 13 per cent in July. The Bank’s own scenarios suggest rates may need to go materially higher if those pressures become embedded. So the split is best read as a deliberate wait-and-see stance, not complacency. But the Bank has little room for error after past criticism that it moved too slowly on inflation. If wage growth and pricing behaviour harden over the summer, today’s caution could quickly look like delay.

3 articles · Updated · The Independent · Jun 15

Thursday’s MPC meeting is widely expected to leave the Bank of England’s key rate unchanged at 3.75%, with markets seeing less need for further tightening.
Brent crude has fallen nearly 5% to $83 after a framework deal to end the Iran war, while UK government bond yields also dropped, easing inflation pressure.
That shift could feed through to households via lower mortgage swap rates and cheaper petrol, extending recent declines in average two-year fixed mortgage deals.
Food prices are less likely to reverse even if inflation slows, leaving the BoE balancing some relief on energy costs against a weak economy and expected higher unemployment.