The Bank of England left the U.K.’s benchmark interest rate unchanged at 3.75 percent on Thursday, as policymakers continued to weigh the challenge of above-target inflation against weak economic growth.
The decision matched the expectations of economists surveyed by Reuters and was supported by seven of the nine members of the Bank’s Monetary Policy Committee (MPC) during its May meeting. Two members, Chief Economist Huw Pill and external MPC member Megan Greene, dissented, voting instead for a 25-basis-point increase that would have raised the base rate to 4 percent.
Energy price pressures
The latest policy decision comes as higher energy costs triggered by the Iran war have added fresh inflationary pressure across economies worldwide. As a net energy importer, the U.K. remains particularly exposed to fluctuations in global energy prices.
In its policy statement released on Thursday, the Bank of England noted that although energy prices have retreated from their initial surge, the conflict has made the outlook increasingly uncertain. It said the war has made it difficult to predict how energy prices will evolve in the coming months.
Meanwhile, the U.K.’s annual inflation rate remained at a lower-than-expected 2.8 percent in May, with rising transportation fuel costs continuing to contribute to price increases. At the same time, official data released last week showed that the economy contracted by 0.1 percent in April, highlighting the fragile state of economic activity.
Inflation still rising
Although inflation eased to 2.8 percent in April, the decline—largely attributed to changes in the U.K.’s regulated energy price cap—was widely expected to be temporary. The energy price cap is scheduled to increase by 13 percent later this summer, pushing household energy costs to their highest level in two years.
Despite the recent moderation in inflation, the Bank expects price growth to edge higher again as elevated energy costs filter through the broader economy. It said the impact on both inflation and economic activity will depend on how long energy prices remain elevated. While monetary policy cannot influence global energy prices, the Bank emphasized that its responsibility is to prevent temporary price shocks from becoming persistent inflation. It added that policymakers are monitoring developments closely to ensure higher inflation does not become embedded and produce lasting effects across the economy.
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