Key facts
- The Bank of England is anticipated to hold its interest rate at 3.75% on Thursday.
- Governor Andrew Bailey views the current policy as sufficiently tightened, citing economic weakness.
- The UK economy contracted by 0.1% in April, with unemployment projected to rise.
- Some Monetary Policy Committee members, like Huw Pill and Megan Greene, may push for a rate hike.
- Inflationary pressures from the Iran war are a key consideration for the BoE's decision.
The Bank of England is widely expected to hold its benchmark interest rate at 3.75% on Thursday, opting for a pause as it assesses the economic impact of higher energy prices stemming from the conflict in Iran. Governor Andrew Bailey indicated that the central bank has already tightened policy considerably and that the current economic weakness makes it harder for inflation expectations to translate into wage growth.
Official data revealed that the UK economy contracted by 0.1% in April, and the Confederation of British Industry forecasts unemployment to reach an 11-year high of 5.5%. Financial markets are not fully pricing in a Bank of England rate hike until November, a significant shift from earlier expectations of multiple hikes this year.
Despite the prevailing economic headwinds, some members of the Monetary Policy Committee, including Chief Economist Huw Pill and Megan Greene, are likely to advocate for a rate increase. Greene has expressed concern about the breadth of price rises and the risk of failing to act decisively on inflation, while Pill has worried about a dysfunctional labor market with potentially outsize wage increases despite higher unemployment.
British inflation has historically struggled to remain at or below the BoE's 2% target, with post-COVID supply chain disruptions and the war in Ukraine contributing to price spikes. While some economists believe the BoE can afford to wait, others, like Henry Cook, warn against excessive dithering.