Bank of England keeps rates on hold at 3.75% as Iran war shakes outlook

The Bank of England voted to keep its key interest rate on hold at 3.75% on Thursday, as widely expected by economists, as the Iran war continues to pose a dilemma for policymakers.

The central bank was widely expected to stand pat on rates as it waits to see how the energy price crunch caused by the Iran war, and a concurrent reignition of inflationary pressures in the U.K., manifest themselves in the economy.

The bank's Monetary Policy Committee voted in an 8-1 split to maintain the benchmark rate, known as "Bank Rate", at 3.75%, with known hawk BOE Chief Economist Huw Pill the only dissenter voting for a 25 basis-point increase. 

In a summary of its decision-making on Thursday, the BOE said it expected war in the Middle East to continue to push energy and fuel costs higher, noting that its ability to mitigate these pressures with monetary policy was limited.

"The conflict in the Middle East means that prospects for global energy prices are highly uncertain. Monetary policy cannot influence energy prices but will be set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably," it noted.

"The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy."

The most recent inflation data showed the consumer price index rose to 3.3% in March, up from 3% the previous month, as higher fuel prices drove the rate higher.

The BOE said Thursday that inflation is "likely to be higher later this year as the effects of higher energy prices pass through" and that it was wary of second-round effects — such as workers demanding higher wages in the face of higher living costs, potentially fueling more inflation — in the economy.

"There is a risk of material second-round effects in price and wage-setting, which policy would need to lean against. But the labour market continues to loosen, and a weakening economy could contain inflationary pressures. Financial conditions have tightened since the conflict began, which will help to reduce inflation over time," the BOE said.

"Taking all the risks to the economic outlook into account, the Committee judges that it is appropriate to maintain Bank Rate at this meeting."

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