Bank of England Holds Interest Rates, Inflation Risks Remain Monitored
The Bank of England maintained interest rates at 3.75% at its meeting on Thursday (June 17th) after viewing the decline in oil prices in recent days as a positive development. However, this decision was not entirely dovish, as two policymakers voted for an immediate 25 basis point increase to 4% due to persistent inflation concerns.
Megan Greene joined Chief Economist Huw Pill in supporting the rate hike. Both assessed that the price outlook remains unstable, despite the US and Iran reaching a ceasefire. The Bank of England also lowered its forecast for peak inflation to 3.25% in the fourth quarter of this year, lower than its April projection of 3.6%.
Governor Andrew Bailey said the decline in oil prices was an encouraging sign. However, he emphasized that the situation remains difficult to predict, and the risk of energy prices remaining high for a longer period has not completely disappeared. Therefore, the Bank of England remains open to action if inflation rises again.
The Bank of England still faces a dilemma between suppressing inflation and maintaining economic growth. Inflation stood at 2.8%, still above the 2% target, while the labor market began to loosen. Recent data showed 64,000 jobs lost since the Iran war began in February, and private sector wage growth fell to its weakest level in five years.
The MPC minutes noted that weakening demand and the labor market could mitigate the risk of a knock-on effect on inflation. UK GDP also fell 0.1% in April, although the Bank of England (BoE) assessed that the underlying growth rate remained around 0.2% in the first quarter and likely remained at a similar level in the second quarter.
The US-Iran ceasefire helped mitigate the worst-case scenario for inflation, as oil fell below $80 per barrel for the first time in three months, from a peak of $108 per barrel. However, the sustainability of the 60-day ceasefire remains a source of uncertainty for the energy and inflation outlook.
The Bank of England maintained its neutral guidance, stating that it would continue to monitor the situation in the Middle East and was ready to act if necessary to keep inflation moving towards its 2% target over the medium term. The market's next focus will be on the direction of oil prices, employment data, wage growth, and whether inflationary pressures have eased enough to keep interest rates on hold. (arl)
Source: Newsmaker.id
