The Bank of England has maintained interest rates at 3.75% despite inflation rising to 3.1% in August. Three members of the Monetary Policy Committee (MPC) voted to increase rates to 4%, while six decided to stand pat.
It comes as the protracted conflict in the Middle East continues to push crude oil prices higher, impacting inflation. “Monetary policy is being set to ensure inflation comes down to 2% sustainably as the economy adjusts to the energy shock,” the Bank said in a statement.
“There has been little evidence so far of material second-round effects in price and wage setting,” it continued, but the longer higher energy prices persist, the more likely this could start to occur.
The economy has been “slightly stronger than expected”, meaning there is more risk from higher inflation than a cooling economy, the Bank noted. As a result, it “stands ready to act as necessary” to bring inflation back down to its 2% target.
David Rees, head of global economics at Schroders, said the Bank was right to hold rates today as domestically generated inflation is contained, wage growth is decelerating and unemployment near 5% points to “meaningful slack” in the labour market. “This is not an economy crying out for higher rates,” he said.
However, Ed Hutchings, head of rates at Aviva Investors, noted that the Bank will be “getting increasingly uncomfortable” with inflation, adding that he is in “no doubt” that hikes are coming.
He expects the first in November, although he questioned how far the central bank can go, despite the market pricing in a total hiking cycle of around 10 basis points.
Now all eyes will turn to the Budget at the end of October – the first under prime minister Andy Burnham and chancellor John Healey.
Rees said: “October’s Budget will be crucial. A spending splurge could revive domestic price pressures and bring forward rate hikes, but the strain already visible in gilt markets should make an inflationary fiscal expansion less likely. For now, the Bank has room to look through a temporary energy-led rise in headline inflation.”
Michael Browne, global investment strategist at Franklin Templeton Institute, agreed, stating that the Budget will be “critical in shaping the MPC’s thinking ahead of its next meeting on 5 November”.