LONDON, April 30 (Reuters) – The Bank of England left interest rates on hold for the third meeting in a row and policymakers were divided on where borrowing costs are likely to head as it gauges the extent of the inflationary shock from the Iran war.
The BoE’s Monetary Policy Committee voted 8-1 on Thursday to keep Bank Rate at 3.75%, in line with a forecast in a Reuters poll of economists.
Members of the MPC set out three scenarios that show the impact of surging energy prices on the UK economy.
In scenario A, the MPC assumes that oil and gas prices follow the path implied by future curves and households spend less and save more, with the combination of a short-lived energy shock and weakness in demand seen as enough to prevent any second-round effects.
Scenario B shows energy prices peak at similar levels as in A but remain elevated for longer, and second-round effects are assumed to be modest. Scenario C assumes a larger energy shock that leads to much stronger second-round effects than in Scenario B.
Below are key excerpts from comments by individual members of the Monetary Policy Committee about their latest decision.
VOTED TO MAINTAIN BANK RATE AT 3.75%
GOVERNOR ANDREW BAILEY
“This shock will induce a trade-off between higher inflation and softer output, and the appropriate policy response is state contingent.
“If the shock appears to be short-lived or the economy weaker, policy should place relatively more weight on avoiding unnecessary contraction in activity.
“If second-round effects are likely to be greater policy should focus on returning inflation back to target more quickly.
“At the moment, I place most weight on Scenario B, albeit with slightly reduced second-round effects. I place some weight on Scenario C, which would require a stronger monetary policy response.”
DEPUTY GOVERNOR SARAH BREEDEN
“Absent the conflict, underlying disinflation remained on track. This counterfactual matters because financial conditions have tightened significantly since. This provides sufficient restrictiveness to guard against the current risk of second-round effects and gives us some time to learn more about the conflict and how it propagates. My vote balances the uncertainty around second-round effects.
“I place most weight on Scenario B. I do not judge Scenario C as likely, but if it were to materialise, I would stand ready to react, forcefully if necessary, to return inflation to target sustainability.”
DEPUTY GOVERNOR CLARE LOMBARDELLI
“A tightening in monetary policy and financial conditions relative to before the war is warranted. Holding rates provides an appropriate degree of restrictiveness while we learn more about the scale of the shock and its propagation.”
DEPUTY GOVERNOR DAVE RAMSDEN
“I see upside risks to energy prices relative to futures curves and so place equal weight on Scenarios A and B, though do not completely rule out Scenario C. Under Scenario B, I would consider raising Bank Rate and accepting a larger output gap as a result. If, however, some of the downsides risks in scenario A materialise, I would favour a less restrictive path.”
EXTERNAL MPC MEMBER MEGAN GREENE
“I am more worried about the price-setting than wage-setting channel of second-round effects. In my view, second-round effects in Scenario B represent a lower bound for what is likely. We may end up with inflation somewhere between Scenarios B and C, necessitating a tighter stance.
“For now, the yield curve has tightened enough to give us time to hold and learn, if not much about second-round effects soon then at least about the nature of the shock. An increase in Bank Rate may be necessary in upcoming meetings.”
EXTERNAL MPC MEMBER SWATI DHINGRA
“I am not strongly attached to any one of the energy price scenarios and A, B, and C all remain in play. In the event of a swift resolution and materially lower energy prices, further reduction in Bank Rate would be warranted, and possibly quickly. Alternatively, we could be faced with a sharper policy trade-off under a larger and longer energy shock.
“Labour market slack, weak demand and restrictiveness from the previous tightening cycle should already be weighing against sustained momentum in second-round effects under scenarios closer to B. If the situation were to worsen, this may warrant some tightening, but there is a limit to how much output loss should be acceptable.”
EXTERNAL MPC MEMBER CATHERINE MANN
“Against the backdrop of the Middle East conflict, and given the underlying model structure, the scenarios overestimate both the projected opening up of slack and the moderation of inflation. Inflation continuing to rise through 2026 could be embedded in 2027 via wage bargaining and state-dependent pricing.
“On balance, I expect greater additional second-round effects than in the scenarios. An ‘active hold’ now – emphasising concerns over inflation persistence, while acknowledging implications for employment and activity – allows for more readings on salience, attentiveness, and threshold effects.
“Should I see continued rising inflation outturns and expectations, I would expect to increase Bank Rate so as to lean against inflation rising into 2027.”
EXTERNAL MPC MEMBER ALAN TAYLOR
“I currently place more weight in the zone between Scenario A and the path with standard treatment, where conflict subsides and energy prices moderate to year-end, with legacy damage to the UK and other economies. This would entail a hold for some time, then a move to a neutral or accommodative stance. We will know more by June and July about the likely conflict scenario.”
VOTED TO HIKE BANK RATE TO 4%
CHIEF ECONOMIST HUW PILL
“Second-round effects in price and wage-setting stemming from this shock have potential to raise UK inflation beyond the near term in a persistent manner. Our scenarios illustrate how a stronger impulse to inflation may strengthen second-round effects. But I see the risk of second-round effects in each of these scenarios skewed to the upside.
“As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in Bank Rate will help mitigate upside risks to price stability stemming from a re-emergence of intrinsic inflation persistence.”
(Writing by Suban Abdulla, editing by David Milliken)
((david.milliken@thomsonreuters.com))
Keywords: BRITAIN BOE/QUOTES
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