The Bank of England’s Monetary Policy Committee (MPC) has kept rates unchanged at their July meeting at 3.75%.
It was decided by a vote of six to three, with the dissenters opting to increase the Bank rate by 25 basis points to 4%.
In its Monetary Policy Summary, the Bank noted that events in the Middle East have kept energy prices volatile, adding that the impact of the energy shock on the UK economy “remains uncertain”.
It highlighted that CPI inflation has fallen to 2.6% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through.
“Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably,” the report said.
The MPC noted that the risk of second-round effects in price and wage-setting is greater the longer higher energy prices persist, although there are no signs of this yet.
Ed Hutchings, head of rates at Aviva Investors, said the decision was “fully expected” but said the vote split shows there is “a lot of uncertainty amongst MPC members”.
“How this plays out is far from clear and although recent employment and inflation data has been of some comfort, investor attention and the committee’s focus is likely to be on risks around the outlook ahead, and particularly so from an inflation standpoint.”
Richard Carter, head of fixed interest research at Quilter Cheviot, noted that there is “increasing noise that rate rises are around the corner”, with the market pricing in at least one interest rate rise in the UK this year.
“There is perhaps a realisation that we are once again in a period of higher interest rates, relative to recent history, for a longer period of time than expected,” he said.
Hutchings suggested the market is pricing in even larger hikes for the remainder of the year, with close to 60 basis points of increases already priced.
This has already impacted mortgages, where costs were already rising before the announcement today. Adam French, head of consumer finance at Moneyfactscompare, said more than 30 lenders have increased rates in recent weeks.
“While the initial market reaction has been fairly muted, it remains to be seen whether the slightly more hawkish tone struck by the Bank of England’s Monetary Policy Committee (MPC) fires the starting gun on a fresh wave of mortgage rate hikes,” he said.
Not all were convinced, however. Felix Feather, economist at Aberdeen, noted that today’s vote split was “slightly more hawkish” than expected and increases the chance that rates could move higher in the future. But this is not a guarantee.
“We still see a path to avoiding rate hikes. The BoE’s next full monetary policy report meeting won’t come until November, leaving plenty of opportunity for the situation in the Middle East to de-escalate before the MPC’s hand is forced. Still, risks to our forecast for rates to remain on hold until the end of the year are very much stacked to the upside,” he said.