Interest Rates May Rise if Iran War Price ‘Shock’ Persists
The Bank of England “stands ready to act” on interest rates to hold back rising prices, its governor Andrew Bailey has said, if the Middle East conflict continues. His comments came as the Bank announced it was leaving its key rate unchanged at 3.75%. Before the conflict a rate cut had been expected.
The Bank said prices would rise more quickly due to the “new shock to the economy” and now expects inflation to be close to 3.5% in March.
All members of the rate-setting committee voted to hold rates and “assess how events unfold”. They also discussed whether a rate rise could be needed, although Bailey suggested markets were “getting ahead” of themselves in assuming several rises this year.
Before the US-Israel attack on Iran, economists had expected inflation and interest rates to fall further this year. Some had pencilled in a rate cut for March. But the committee decided to hold, in the first unanimous vote for four-and-a-half years.
The BBC is reporting that the conflict has pushed up the price of oil and gas sharply, with attacks on energy infrastructure in the last 24 hours adding further upward pressure. That has raised the prospect of another pick-up in inflation.
“War in the Middle East has pushed up energy prices. You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year,” said Bailey.
The only way to address higher energy prices was by restoring safe passage for shipping in the Gulf, he said. But he emphasised the focus of the Bank’s Monetary Policy Committee (MPC) was on the wider knock-on impact on prices.
“Whatever happens, our job is to make sure inflation gets back to its 2% target,” said Bailey. Inflation in January stood at 3%.
The language at recent meetings of the MPC has centred around a reduction in borrowing costs. At February’s meeting members were split, with four backing a cut and five, including the Bank’s governor, voting to hold rates steady.
Notes from this meeting showed the debate has been turned on its head, with the committee all backing a hold in rates. They also discussed whether a rate rise could be required in the coming months, something which financial markets now think could be the next move.
Following the Bank’s latest decision and comments, traders are predicting there could be two hikes before the end of the year, taking rates to 4.25%.
“Rate hikes are now a real risk for the economy,” said Deutsche Bank’s UK chief economist Sanjay Raja. “Should energy prices stick at current levels, the MPC could be forced into pushing rates higher to curb inflation.”
However, Bailey warned against assuming there would be multiple rate rises this year, and cautioned against reaching “strong conclusions about raising interest rates”. “Today we’ve given a very clear message. The right place to be is on hold,” he said.
The change in expectations over the future path of interest rates has already had an impact on the mortgage market.
Over the past few weeks, rates on new fixed deals have risen sharply and hundreds of mortgage products have been withdrawn by lenders.