The Bank of England left its key base rate unchanged at 3.75%, with the Monetary Policy Committee (MPC) voting 6–3 to hold, according to the Bank's statement. Three members favored a 0.25 percentage point increase to 4%.
The three members who voted for a rise were chief economist Huw Pill, Megan Greene, and Catherine L Mann. Governor Andrew Bailey was among the six who voted to hold rates.
The Bank noted that underlying domestic inflationary pressures were absent, and without the conflict in the Middle East, inflation would be on track to fall close to the 2% target. However, oil prices have climbed back above $90 a barrel. Governor Bailey specifically cited the Iran war and oil price as contributing factors to the upside risk in energy prices.
Financial markets had priced in a more-than-90% probability of rates being kept on hold, and City investors expect a rise in borrowing costs to 4% before the end of the year. Mortgage and commercial lending rates have already tightened due to market expectations.
The Bank's latest forecasts predict inflation will peak at 3.2% next spring, but could reach 4.1% if the conflict persists and Brent crude prices exceed $100 a barrel. The UK has already lost an estimated £28 billion in growth this year due to the Middle East conflict, according to the National Institute of Economic and Social Research (NIESR).
Prime Minister Andy Burnham announced a package to remove VAT from electricity bills, reducing them by an average of £45 a year from October. The policy is expected to reduce headline inflation by 0.1 percentage point.
The MPC said that the process of underlying disinflation that was intact before the conflict remains in train, but warned that second-round effects risk increases as high energy prices persist, though there is little evidence so far. Bailey described the size and duration of energy price expectations as a key uncertainty for UK inflation.
The three MPC members who voted for a rate increase argued that once prices begin rising again, workers and companies are likely to react, embedding inflationary pressures even if the conflict is settled. The majority focused on a rise in unemployment and a sharp fall in vacancies over the last three years, as well as relatively weak household demand and moderate wage growth.