Live, rolling coverage of business, economics and financial markets as three members of monetary policy committee vote to raise rates
Bank of England governor Andrew Bailey says higher energy prices will push up inflation in the coming months, as he starts his press conference.
However, Bailey says there is little evidence that inflationary pressures are becoming embedded in the UK economy. In fact, there is underlying disinflation – slowing price growth – in the UK, he says.
Deputy governor Clare Lombardelli is asked if it was a close call to hold rates. She says it was not a close call.
She cites the length of the conflict, but also that energy prices found something of a ceiling. But the Bank has its eye on the evidence of second-round effects on inflation, she says.
Bank of England governor Andrew Bailey says you can even look at the last week to show the uncertainty over the Iran conflict. It is hazardous to make assumptions.
There is quite a lot of evidence that profit margins are taking more of the cost pressures, but there is still a long way to go on that, he says.
Bank of England governor Andrew Bailey has now moved on to taking questions.
The world is so uncertain at the moment that it is harder to say how likely any single scenario is, he says.
The world feels as uncertain and volatile today as it did three months ago in April, he says.
There is more evidence that the disinflation process in the UK is in place, he says.
Clare Lombardelli, a deputy governor, says that the Bank has learned that the conflict could go on for longer, but also that the most extreme energy price scenarios have not come to pass.
And Dave Ramsden, another deputy governor, chips in says the balance of risks on inflation is tilted to the upside.
Bank of England governor Andrew Bailey raises the possibility of an “episodic” war in Iran.
If the conflict in the Middle East persists, it is likely we will have to tighten policy, he says. But it could be looser monetary policy if there is peace.
The situation in the Middle East is “highly uncertain”, he says. But we have to set policy now and try to look through it.
The backdrop of relatively weak household demand reduces the ability of businesses to pass on price rises to customers, Bank of England Andrew Bailey says.
The lack of spare capacity in the labour market means people may struggle to get higher pay packets, he says.
But the lack of evidence so far does not rule out that second-round effects could kick in in the future, he says. The Bank’s assessment is “tentative” at this point.
Bank of England governor Andrew Bailey is showing oil price graphs from the monetary policy report.
He says there are “significant moves” in oil markets, and highlights the fall of supply of refined products.
The size and duration of the outlook for energy prices is a key uncertainty for UK inflation, he says.
Ofgem’s price cap will rise to about £1,600 for an average household energy bill, Bailey says.
We have to watch carefully that the direct and indirect effects of inflation do not get embedded into businesses’ and households’ expectations, Bailey says.
Reassuringly, there is little evidence of those second-round effects, he adds.
Bank of England governor Andrew Bailey says higher energy prices will push up inflation in the coming months, as he starts his press conference.
However, Bailey says there is little evidence that inflationary pressures are becoming embedded in the UK economy. In fact, there is underlying disinflation – slowing price growth – in the UK, he says.
The probabilities of a “no change” decision at the next meeting in September are still inching up as investors digest the Bank of England’s statement.
Investors appear to be looking at the Bank’s statement that it did not see much evidence of “second-round effects” from the oil price increases caused by the US-Israeli war in Iran. In other words, oil prices are up, which directly affects businesses and households, but there is not much evidence that businesses are then putting up their own prices to account for that.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said:
The committee’s guidance looks slightly less hawkish to us. The MPC inserted a sentence in the Monetary Policy Summary saying that “There is little evidence so far to suggest such [second-round] effects, and there have continued to be clear signs of underlying disinflation in recent data”.
Granted, the rest of the minutes signal that limited evidence of second-round effects so far is far from surprising given the usual lags. The committee concluded that the arguments “warranted caution in placing too much weight on initial evidence in determining the possibility of stronger second-round effects.”
Why did Catherine Mann change her vote in favour of interest rate hikes? Donald Trump’s renewed attacks on Iran were the key reason – as well as establishing “policy credibility” by raising rates when inflation rises.
In the monetary policy summary published by the Bank, she wrote:
Most indicators of nominal conditions have continued to moderate, although near-term inflation estimates skirt the inflation attentiveness threshold at which research suggests stronger second-round effects, which would build on an inflation rate that has remained above target for five years.
That said, the key change in the environment for my decision is the collapse of the US-Iran memorandum of understanding, the widening of the Middle East conflict, and the associated volatility in energy prices. This “sporadic continuance” of the conflict that I hypothesised last month appears to be the state of play.
The shocks and volatility transmit through salience and production costs to affect expectations and price setting behaviours to impart an upward ratchet to CPI inflation.
A variety of research methods concludes that Bank Rate should be higher than 3.75% to return inflation to the 2% target sustainably. Other research emphasises that the costs of leaning against upside risks that fail to materialise would be smaller than the cost of leaning too little against upside risks. Notwithstanding moderately restrictive nominal financial conditions, reinforcing policy credibility when faced with inflationary shocks implies that a 25 basis point increase in Bank Rate is appropriate at this time
Donald Trump’s renewed attacks on Iran have caused concerns that inflationary pressure may build again. But for now that has not come through clearly, leaving a majority of the Bank of England’s ratesetters content to wait before raising interest rates.
Alpesh Paleja, deputy chief economist at the Confederation of British Industries, the biggest UK business lobby group, said:
One silver lining is that the Bank is starting from a relatively more favourable position. Prior to the latest escalation, energy prices had fallen back significantly. Inflation and wage data have also come in lower than previously expected. Moreover, a looser labour market should also help limit the pass-through into broader domestic price pressures.
These competing influences on inflation mean that interest rates will likely remain on hold for now. Globally, much depends on the duration and intensity of the renewed energy price shock. Closer to home, the Bank may also wait for greater clarity on the fiscal outlook as we head towards the new chancellor’s first budget in the Autumn.
And again from Suren Thiru, chief economist at the Institute for Chartered Accountants (ICAEW), who said:
Keeping interest rates on hold is a predictably pragmatic response to the conflicting realities of softer-than-expected inflation on the one hand and renewed US-Iran hostilities threatening a fresh wave of price rises on the other.
The tighter vote split in favour of this outcome confirms a further hawkish shift within the committee with inflation worries outweighing concerns over the economy, keeping a September rate rise on the table.