BoE Delivers Unanimous Rate Hold, Prioritising Inflation Concerns

The Bank of England's Monetary Policy Committee voted unanimously, 9-0, to maintain the Bank Rate at 3.75%. This decision was primarily driven by inflation risks stemming from the Middle East war, with some MPC members indicating an increased likelihood of monetary tightening . This outcome was more hawkish than anticipated, as consensus expected a 7-2 vote to maintain the status quo. All MPC members confirmed their readiness to act as necessary to ensure CPI inflation remains on track to meet the 2% target in the medium term. The Committee highlighted that UK inflation could reach 3.5% in Q3 and expressed vigilance regarding the risk of higher inflation expectations becoming anchored in the economy. In light of these concerns, the BoE has dialed back its forward guidance suggesting imminent rate cuts. Instead, it is prioritizing a clearer assessment of the inflationary shock from surging energy prices. Overall, the MPC's assessment leans towards a greater risk of higher inflation rather than a significant economic slowdown. This suggests a bias towards tightening monetary policy in the period ahead. Following news of further damage to energy infrastructure in Qatar and a more hawkish stance from the MPC today, our adverse scenario is now considered our central projection . This scenario assumes a severe and lasting energy supply shock that would raise inflation by approximately 1 to 1.5 percentage points. While wage growth continues to ease and the unemployment rate is still forecast to rise later this year, these factors are unlikely to trigger an economic recession in the immediate term. Consequently, the inflationary impact of these developments will be a more pressing concern for the Bank of England. As such, policy tightening back to 4% or even 4.25% are now viable options.