MercoPress. South Atlantic News Agency

Bank of England keeps rate at 3.75%; inflation 2.8% but energy prices remain volatile

The impact of the energy shock and Middle East events on the UK economy remains uncertain, BoE MPC

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7–2 to maintain Bank Rate at 3.75%. Two members voted to increase Bank Rate by 0.25 percentage points, to 4% during the MPC meeting on June 18.

In its release MPC argues that global energy prices have fallen since the previous meeting in response to events in the Middle East, but remain higher than pre-conflict and have continued to be volatile.

The impact of the energy shock on the UK economy remains uncertain. Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy.

CPI inflation has fallen to 2.8% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through. The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist. But the labor market continues to loosen, and signs of a weakening economy could contain inflationary pressures.

Interest rates faced by households and businesses remain higher than prior to the conflict, which will act to reduce inflation over time.

Taking all the risks to the economic outlook into account, the Committee judged that it was appropriate to maintain Bank Rate at this meeting.

The Committee will continue to monitor closely the situation in the Middle East and how its impact propagates through the economy.