MNI BOE WATCH: Unanimous Hold As Rate Path Depends On War

The Bank of England's Monetary Policy Committee held its policy rate at 3.75% on Thursday against a backdrop of war in the Middle East which it said will push up inflation, though the magnitude and duration of that effect remains unclear.

"Preliminary staff estimates, based on energy price developments in the run-up to this meeting, indicated that CPI inflation was now likely to be between 3 and 3-½% over the next couple of quarters," the Bank said in the published minutes for the March meeting. CPI had been expected to fall back to the 2% target from April.

While recognising that "monetary policy cannot influence global energy prices," the MPC committed to "[ensuring] that the economic adjustment to them occurs in a way that achieves the 2% target sustainably."

Markets interpreted the guidance as a hawkish pivot, but Governor Andrew Bailey said in a later pooled interview that he would "caution against reaching any strong conclusions about us raising interest rates," echoing Alan Taylor who said in his comments that it was "inappropriate to infer a directional shift from this meeting".

The MPC emphasised that it was "ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term."

SHIFT IN VIEWS

Bailey's individual paragraph noted that "monetary policy cannot reverse this shock to supply." However, as "a prolonged disruption to the supply of oil, natural gas and other commodities such as fertiliser and neon gas increases the upside risk to inflation," the MPC must be ready to "respond to the risk of a more persistent effect on UK CPI inflation." (See MNI POLICY: Iran War Shock To Magnify BOE's MPC Fractures)

He noted that inflationary episodes earlier in the 2020s may have increased households' and businesses' sensitivity to a new inflation shock, although "the starting point for this shock is a real economy with limited pricing power." Amid such a range of factors, he intends to "[monitor] developments extremely closely."

Huw Pill and Megan Greene both referenced an upward revision in the Agents' pay survey to 3.6% growth in 2026. Pill said that potential second-round effects justified caution, and that he would monitor whether a tightening of financial conditions in recent weeks "proves sufficient to contain potential upside risks to price stability." 

Greene said that "the risk of inflation persistence has risen, perhaps significantly," in light of the war, but that the hold in Bank Rate will allow her to "learn more about the size and duration of the shock, and the extent of potential second-round effects."

Lombardelli said "we are early in the process of assessment," but that while policy had been "broadly neutral or mildly restrictive," she is "prepared to act as needed to address any persistent inflationary effects."

PREVENTED VOTES FOR CUT

Sarah Breeden, Catherine Mann, Dave Ramsden and Taylor all said that they either would have supported or considered supporting a cut if the war had not taken place.

Ramsden said that whereas he "would have otherwise voted for a 25-basis-point cut," in light of the war he would "act as necessary to ensure that CPI inflation remains on track." Breeden similarly described the economic adjustment to the shock as "hugely uncertain, with risks to both sides."

Mann wrote that "since the conflict may yield a sustained inflation shock, I see the balance between inflation and activity to have shifted away from considering a cut towards considering a longer hold, or even a hike at some point to lean against inflation persistence."

Taylor also noted events "could imply faster and potentially deeper cuts," while "massive uncertainty around future energy prices" imply "a high bar to hiking."

Similarly, Dhingra sketched out a range of scenarios. "A more modest increase in emergy prices" would slow rather than derail disinflation, but "severe and longer-lasting constraints on oil and gas supply...  could warrant a hold or increase in bank rate." A lower-inflation scenario, by contrast, would "possibly quickly" lead to further reduction in Bank Rate.