BoE holds rates as expected at 3.75%, Vote split: 7-2, Greene & Pill dissent, voted for a hike.

General Statement

• Greene and Pill vote to hike by 25bps.
• Repeats MPC stands ready to act as necessar to ensure CPI meets 2% target in medium term.
• CPI could reach a little over 3.25% in Q4 (April: 3.6-3.7% in Q4 under scenarios A and B, 6% under scenario C)
• Acknowledges Middle East peace deal but says outlook for energy prices remains uncertain.
• Cuts inflation outlook for this year, sees slighty faster underlying growth vs April projections.
• Sees underlying Q2 GDP growth of around +0.2% in (prev. +0.1% in April forecast)
• Recent data outturns had provided some greater reassurance that there had been sustained disinflation pre-conflict
• The immediate direct effects of the energy shock on inflation, and some indirect effects through higher input costs for firms, had so far evolved broadly as had been expected in April
• Members judged that risks to energy prices were still skewed to the upside.
• Clear evidence of signs of second-round effects would only ever emerge with a lag, and the Committee therefore agreed that it was too early to conclude one way or the other from the initial tentative and mixed evidence

Majority (7 Voted on hold)

• For six of these members (Andrew Bailey, Sarah Breeden, Swati Dhingra, Clare Lombardelli, Dave Ramsden and Alan Taylor), recent data outturns provided some further evidence that underlying disinflation had been on track pre-conflict. Upside risks to energy prices had receded, although they remained.
• The higher interest rates facing households and businesses were already acting to reduce inflation over time and therefore a hold in Bank Rate at this meeting was appropriate.
• There was nevertheless a range of views on how the energy shock might propagate and therefore the policy response that might be required in future.
• For one member (Catherine L Mann) upside inflation risks were more prominent across possible future outcomes, but an immediate increase in Bank Rate was not required given their view that policy tightening would transmit to the economy rapidly.

Bailey

• Recent inflation outturns give greater confidence that gradual underlying disinflation has continued. Labour market data show some further softening, and there are further signs of demand weakness.
• Given the context at present of softness in the real economy and uncertainty around the scale and duration of the shock to energy prices, tolerating temporarily above-target inflation as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained.
• Content at the present time with holding, while accepting that risks to inflation and interest rates are on the upside, as reflected in the upward slope in the sterling yield curve, which appears to be accounted for more by risk premia than expected rates

Mann

• "Why wait? Research shows that a forceful Bank Rate decision can have a quick effect on inflation and inflation expectations. So I have time to continue to evaluate measures of inflation expectations and financial restrictiveness to determine whether firms’ pricing and 2027 wage negotiations are on a target-consistent path for the medium term."
• "Activity, labour market, and nominal pressures have moderated"

Taylor

• "Policy is restrictive, 75 basis points above my estimate of neutral and where we might have been quite soon. The yield curve shows we have tightened a lot just by holding."
• "Absent worse news, I cannot see a case for tightening now, and an active hold is reasonable. If the conflict resolution holds, and risks diminish, lower rates could be preferred."

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Dissenters (Two voted to hike)

• Two members (Megan Greene and Huw Pill) preferred a 25bps increase in Bank Rate at this meeting.
• These members were less confident in the pace of the underlying disinflation pre-conflict.
• They were more concerned that households’ and firms’ greater attention to inflation outturns than in the past would lead to larger second-round effects for a given energy price profile.
• And they noted that the tightening in financial conditions could reverse in the absence of an increase in Bank Rate.
• Given significant uncertainty about the extent of second-round effects, they preferred to raise rates as part of a risk management strategy.

Megan Greene: The implementation of a reported peace deal and the evolution of energy prices remain uncertain. Slack should mitigate the extent of second-round effects triggered by the energy shock, but households and businesses are more attentive to rises in inflation today. This is reflected in households’ and firms’ inflation expectations and the sensitivity of long-term expectations to short-term inflation surprises, which suggest expectations may be less solidly anchored. Given significant uncertainty about the extent of second-round effects, we should pursue a risk management strategy. Analysis conducted using the Bank’s endogenous policy toolkit demonstrates that holding Bank Rate assuming lower second-round effects (Scenario B) but discovering next year they were greater (Scenario M, from my latest speech) and course-correcting results in inflation that peaks higher and remains above target the entire outlook. Hiking Bank Rate assuming greater second-round effects, then discovering they were smaller and course-correcting results in a very moderately lower output gap and inflation returns to target at the end of the forecast period. These risks are asymmetric, so we should insure against the possibility of larger second-round effects until we have evidence to determine they are not materialising. A proactive hike now in Bank Rate should help anchor inflation expectations.

Huw Pill: Upside risks to the lasting achievement of the 2% inflation target have increased in recent months on account of events in the Gulf and their implications for commodity prices and supply chains. Recognising the significant uncertainty that surrounds the UK inflation outlook, raising Bank Rate to 4% continues to be the most robust monetary policy response to the intensification of these risks. Global energy prices remain volatile, and elevated compared with their pre-hostilities level, despite the announcement of a new ceasefire. Even with a looser labour market, the risk that second-round effects will create greater intrinsic persistence in UK inflation remains. One potentially pernicious channel of second-round effects is catch-up dynamics in pricing decisions as firms and households seek to defend their margins and purchasing power in the face of higher food and energy prices. While overall UK financial conditions have tightened since the conflict began, I continue to favour prompt but modest action on Bank Rate now. This would establish a stance of monetary policy that is well-placed to address the significant uncertainties the MPC faces. It will also put the MPC in a good place from which to respond to the evolution of events from here.