BoE Governor Bailey (post-meeting statement) says conflict in Middle East having a significant economic impact

POLICY STANCE: 

• Where we go from here depends on size and duration of energy shock
• The longer the conflict lasts, the worse the impact will become
• Prolonged higher energy prices could result in a higher Bank Rate
• Rates held due to 1) weakness in activity, likely to reduce second round effects; and 2) uncertainty about strength of second-round effects

GEOPOLITICS:

• Conflict in Middle East having a significant economic impact

INFLATION:

• Sees inflation at above 3.5% by year-end, due to Middle East conflict
• Notes uncertainties surrounding forecasts
• Higher energy will feed through to consumer prices
• Indirect impact will be seen on food prices, which may also rise due to increasing fertiliser prices
• There is nothing monpol can do to prevent Middle East impact on inflation
• The 2% inflation target applies at all times; but bringing it back to target quickly after a shock like this can cause volatility
• Monpol usually looks through one-off impacts of energy on inflation; looking through can avoid volatility, given policy lags
• Second-round effects are possible in some scenarios; will depend on UK labour markets, and firms' pricing powers
• Monpol faces difficult judgements as cannot wait for conclusive evidence on second-round effects
• Inflation expectations have risen in response to energy shocks