Closing summary
The Bank of England has left interest rates unchanged at 3.75% but warned that the UK may need to brace for hikes later this year, as “higher inflation is unavoidable” as a result of the war in the Middle East.
The Bank’s rate-setting monetary policy committee (MPC) voted to leave borrowing costs on hold on Thursday, with its nine-member committee split 8-1 in their decision.
Andrew Bailey, the governor of the Bank of England, said: “The war in the Middle East is causing inflation to rise again this year.”
He added that the policymakers were monitoring the global situation and its impact on the UK economy “very closely”, but that the decision to hold rates at 3.75% for now is a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East”.
Financial markets are expecting a rate rise by the end of July, and another one by the end of the year.
Investec economist Sandra Horsfield explained:
The market reaction has been considerable: the market has scaled back its expectations of BoE rate hikes, now pricing in 62 basis points of rate increases by the end of this year, whereas shortly before the decision, it had priced in over 70bps of hikes.
This reflects less the policy decision today and more the message the monetary policy committee sent about how it sees policy evolving from here: the MPC did not send as strong a warning about potential future rate hikes as markets had priced in.
The European Central Bank also left interest rates unchanged as expected but discussed a rate hike “at length”.
The bank, which sets interest rates for the 21 countries that are in the eurozone, signalled mounting concerns over soaring inflation, leading to market epectations of several rate hikes this year, with the first move expected in June.
Oil prices have retreated after a 7% jump earlier. Brent crude is down 2.9% at $114.65 a barrel, after rising as high as $126.41 a barrel this morning.
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Thank you for reading. We’ll be back tomorrow. Take care! – JK
Updated
More thoughts on the ECB from Felix Feather, an economist at Aberdeen.
Just a month ago, markets were pricing in an 80% chance of the European Central Bank delivering a hike at today’s meeting. That chimed with the very hawkish communications key ECB officials were delivering at the time, which often drew parallels between the 2022 energy shock and today’s. But in the end, the decision to hold the deposit rate at 2% came as no surprise to either our forecasts, consensus, or market pricing, which priced an 8% change of a hike.
Certainly, the energy shock hasn’t unwound as hoped. At time of writing, brent crude prices sit above $116 a barrel.
And many of the waymarks to hiking laid out by ECB chief economist Phillip Lane have been hit. Surveyed household inflation expectations, firm selling price expectations, the PMI output prices subindex, and headline inflation have all moved sharply higher over the past month.
But weak activity data has prompted key ECB officials to soften their rhetoric for fears of impairing the demand side. We see the ECB eventually hiking this year, probably multiple times. But soft demand and tighter financial conditions could help attenuate the passthrough of higher costs to consumer prices.
