The Bank of England’s Monetary Policy Committee voted 7–2 on Thursday to keep its key rate at 3.75%, the level it has held since December. The decision comes as central banks worldwide navigate the uncertain economic effects of a potential reopening of the Strait of Hormuz after the US and Iran reached an interim peace deal on June 15.
Prices of oil and natural gas have fallen since the agreement was announced, but remain above prewar levels. Many details of a final peace accord have yet to be settled, and it remains unclear how quickly energy supplies transiting the strait will return to prewar flows.
BOE Governor Andrew Bailey said the central bank would move quickly if the situation changed. “I would respond promptly to any signals that an extended period of elevated energy prices could be leading to stronger possible second-round effects,” Bailey said.
Two of the nine MPC members—including Megan Greene, one of the four external members—voted for a rise in the key rate to 4%. “We should insure against the possibility of larger second-round effects until we have evidence to determine they are not materializing,” Greene said.
For most policymakers, the potential peace deal means the risk of a sustained pickup in inflation has been reduced but not eliminated, leaving the possibility of a rate increase this year still on the table.
The cautious stance echoes moves by other central banks. The Bank of Japan warned Tuesday that it may raise rates again after hiking to the highest borrowing costs in 31 years. The European Central Bank’s chief economist said eurozone rates could be lifted again. The US Federal Reserve left its key rate unchanged Wednesday but signaled the next move could be a rate increase. Sweden’s Riksbank warned that the probability of a rate rise later this year had grown despite the peace deal.
Earlier Thursday, the central banks of Indonesia and the Philippines raised their key rates. Switzerland and Norway left policy unchanged, but Norges Bank Governor Ida Wolden Bache said, “If developments turn out as currently envisaged, the policy rate will be raised at one of the forthcoming monetary policy meetings.”
Some analysts cautioned against assuming the global rate-hiking cycle has ended. “With the Strait set to reopen it is tempting to think that the global rate-hiking cycle is already over,” said Dario Perkins, an economist at TS Lombard. “That assessment looks wrong. Underlying inflation remains too high and growth is set to reaccelerate.”
In the UK, annual inflation was lower than expected at 2.8% in May, but household energy prices are scheduled to rise by 13% from July, a development likely to push the rate above 3%. The UK economy contracted in April after a strong start to the year, and the BOE’s own surveys indicate that businesses do not believe demand is strong enough to allow them to raise prices enough to keep profit margins intact.
Despite the warning that a rate increase may still be needed, more economists now expect the BOE’s next move to be a cut unless the conflict flares up again or the reopening process proves protracted. Andrew Wishart, an economist at Berenberg Bank, said, “In the benign scenario that now appears more likely, we think that the next move will be a cut, in December.”
Before the conflict began in late February, the BOE had expected to lower borrowing costs by half a percentage point this year. Policymakers consider a rate of 3.75% as one that restrains activity. External MPC member Alan Taylor, a Columbia University economics professor, said, “If the conflict resolution holds, and risks diminish, lower rates could be preferred.”