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BOE STATEMENT: BoE maintains Bank Rate at 3.75%, as expected, in 8-1 vote (exp. 9-0); Pill votes to raise Bank Rate by 25bps to 4%

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BOE STATEMENT: BoE maintains Bank Rate at 3.75%, as expected, in 8-1 vote (exp. 9-0); Pill votes to raise Bank Rate by 25bps to 4%

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VOTE

  • BoE maintains Bank Rate at 3.75% in 8-1 vote
  • Bailey, Breeden, Dhingra, Greene, Lombardelli, Mann, Ramsden, Taylor vote to maintain Bank Rate at 3.75%
  • Pill votes to raise Bank Rate by 25 bps to 4%

GUIDANCE

  • BoE says policy stance required will depend on scale and duration of energy shock and how it propagates through economy
  • BoE says it stands ready to act as necessary to ensure CPI inflation remains on track to meet 2% target in medium term
  • BoE says appropriate monetary policy response would be state-contingent
  • BoE says more pronounced inflation overshoot as in Scenario C likely to warrant forceful tightening in monetary policy
  • BoE says less restrictive policy stance would be required in Scenarios A and B than in Scenario C
  • BoE says some members might prefer to act early as insurance against inflation persistence risks
  • BoE says other members might prefer more conclusive evidence of inflation persistence before acting

INFLATION

  • BoE says Middle East conflict makes prospects for global energy prices highly uncertain
  • CPI inflation has increased to 3.3%
  • BoE says CPI inflation likely to be higher later this year as higher energy prices pass through
  • BoE sees risk of material second-round effects in price and wage-setting, which policy would need to lean against
  • BoE says weakening economy could contain inflationary pressures
  • BoE says financial conditions have tightened since conflict began and will help reduce inflation over time
  • BoE says direct impacts from recent energy supply shock already visible in higher household motor fuel prices
  • BoE says indirect effects of high energy prices via increased production costs expected to be significant and likely to affect food prices particularly
  • BoE says second-round effects likely to materialise more quickly via pricing channels than wage-setting
  • BoE says household short-term inflation expectations have risen
  • BoE says wage growth had been easing towards target-consistent rates
  • BoE says private sector wage settlements for 2026 had been largely completed before shock occurred

ECONOMY

  • BoE says labour market continues to loosen
  • BoE says continued weakness in activity would limit strength of second-round effects
  • BoE says current events are occurring from starting point of lower inflation, weaker demand, looser labour market and restrictive monetary policy than previous energy shock in 2022
  • BoE says unemployment could rise further owing to weak consumption and households increasing precautionary saving
  • BoE says energy shocks involve a trade-off between inflation and output
  • BoE says all members noted financial conditions had tightened materially since onset of conflict
  • BoE says tighter financial conditions would help feed through to lower inflationary pressures over time

FORECASTS

  • Bank staff expected CPI inflation to decline to 3.1% on average in 2026 Q2 before rising back to 3.3% in Q3
  • BoE says Q3 CPI projection was 1.4 ppts higher than at time of February Monetary Policy Report
  • BoE says CPI inflation expected to rise somewhat further in Q4
  • April Market Participants Survey median expectation was for Bank Rate to be maintained at current level this year
  • Market-implied path for Bank Rate in 15 days to 22 April was upward-sloping, suggesting some increase in Bank Rate this year
  • BoE says Scenario A assumes energy prices follow market futures curves with no second-round effects from latest energy shock
  • BoE says Scenarios B and C assume energy prices higher and more persistent than futures paths to varying degrees
  • BoE says second-round effects are incorporated in Scenarios B and C, and materially so in Scenario C

Pill (lone dissenter)

  • Pill says prompt but modest hike in Bank Rate would help mitigate upside risks to price stability. Pill says second-round effects could raise UK inflation beyond near term in persistent manner. 
  • But I see the risk of second-round effects in each of these scenarios as skewed to the upside. I recognise that second-round effects may be more modest with a looser labour market.
  • As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in Bank Rate will help mitigate upside risks to price stability stemming from a reemergence of intrinsic inflation persistence.

Bailey

  • Bailey says softer real economy makes it appropriate to maintain Bank Rate. Bailey places most weight on Scenario B with slightly reduced second-round effects and some weight on Scenario C
  • If the shock appears to be short-lived or the economy weaker, policy should place relatively more weight on avoiding unnecessary contraction in activity.
  • If second-round effects are likely to be greater, policy should focus on returning inflation back to target more quickly.

Others

  • Breeden says financial conditions provide sufficient restrictiveness to guard against current risk of second-round effects. Breeden says she would stand ready to react forcefully if Scenario C materialised
  • Dhingra says swift resolution and materially lower energy prices would warrant further reduction in Bank Rate, possibly quickly. Dhingra says worsening situation may warrant some tightening, but there is a limit to acceptable output loss
  • Greene says yield curve has tightened enough to give time to hold and learn. Greene says an increase in Bank Rate may be necessary in upcoming meetings
  • Lombardelli says holding rates provides appropriate restrictiveness while learning more about scale and propagation of shock. Lombardelli says Scenario C is plausible and would require policy to respond more forcefully to inflationary pressures
  • Mann says she expects greater additional second-round effects than in the scenarios. Mann says continued rising inflation outturns and expectations would lead her to expect to increase Bank Rate
  • Ramsden says holding Bank Rate is most appropriate response to ongoing uncertainty
  • Ramsden says he would consider raising Bank Rate under Scenario B and would favour a less restrictive path if downside risks in Scenario A materialise
  • Taylor says current scenario would entail a hold for some time, then a move to neutral or accommodative stance. Taylor says neutral at 3% means it makes sense to hold for risk-management reasons and because tighter financial conditions are amply restrictive

Context

The Bank of England (BoE) has maintained the Bank Rate at 3.75%, which aligns with market expectations. However, the dissent from member Pill, who advocated for a 25 bps hike, reflects growing concerns about inflation persistence and the potential need for a more aggressive monetary policy response if inflationary pressures escalate. This divergence in views highlights the ongoing balancing act the BoE faces between supporting a weakening economy and addressing inflation risks, and it may have implications for future rate path expectations and market sentiment.

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