Bank of England Governor Andrew Bailey has indicated a potential for an interest rate hike, citing ongoing global uncertainty and volatile energy prices as key factors. The Monetary Policy Committee (MPC) recently voted 6-3 to maintain the current borrowing cost at 3.75 percent, a decision that saw a split among its members.
MPC rate-setter Catherine Mann, along with colleagues Huw Pill and Megan Greene, voted for an immediate quarter-point increase to 4 percent. Mann attributed her shift in vote to the breakdown of the US-Iran ceasefire, the escalation of the Middle East conflict, and the subsequent fluctuations in energy prices. Bailey, however, described the decision to hold rates as "appropriate," even as global conditions lean towards being more "inflationary" while domestic circumstances remain "more benign."
Bailey emphasized that the world, particularly events in the Middle East, presents a level of uncertainty and volatility comparable to earlier stages of the Iran war. Despite this, he clarified that the Bank is not on the verge of raising rates to combat inflation. "Please do not leave this room thinking the Bank is edging towards a hike, because there’s nothing in what I said along those lines," he told reporters.
Financial markets still anticipate at least one rate increase this year, though the likelihood of a hike at the MPC's September meeting has decreased to below 30 percent. Government borrowing costs saw a slight decrease, with yields on ten-year UK bonds falling 5 percent after a spike the previous day.
Deutsche Bank's chief UK economist, Sanjay Raja, noted that prolonged Middle East tensions increase the risk of a policy shift in the coming months. The Bank of England stated its readiness to act if the conflict persists and inflation remains significantly above its 2 percent target.
The latest projections indicate that inflation, currently at 2.6 percent, is expected to peak above 3 percent in 2026, largely due to an anticipated rise in typical household energy bills from £1,663 to £1,680. In a more severe scenario, where oil prices exceed $100 a barrel—currently hovering just above $90 for Brent crude—inflation could surpass 4 percent next year. The Bank forecasts a slight weakening in economic activity over the next few quarters, with subdued growth of 1.1 percent projected for the current year. Unemployment, presently at 4.8 percent, is expected to rise gradually to 5.1 percent by year-end.