Interest rates have been left unchanged but remain subject to change as inflationary pressures persist despite the peace settlement in the Middle East.
The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7–2 to maintain Bank Rate at 3.75%. Two members voted to increase it by 0.25 percentage points, to 4%.
In minutes published with the announcement, it said global energy prices have fallen since the previous meeting in response to events in the Middle East.
“But they remain higher than pre-conflict and have continued to be volatile. The impact of the energy shock on the UK economy remains uncertain,” it said.
“Monetary policy cannot influence energy prices but is being set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably. The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy.”
Governor Andrew Bailey said recent drops in oil prices are “encouraging” but high energy prices during the US-Israel war with Iran have still left “inflationary pressure in the pipeline.”
The committee said that CPI inflation has fallen to 2.8% since the previous meeting, although it is expected to rise later this year as the effects of higher energy prices continue to pass through.
Luke Bartholomew, deputy chief economist, at Aberdeen said: “The Bank of England was widely expected to keep rates on hold today, so no surprises in the decision. The two votes for a hike show there are some policymakers still concerned about underlying inflation pressures.
“We think the BoE will be able to avoid the kind of monetary tightening that the European Central Bank has already started to deliver and that the Fed hinted at last night. In fact, if energy prices continue to moderate then the debate could once again turn again to rate cuts, but that might have to wait until next year.”
Jeremy Batstone-Carr, European strategist at Raymond James Wealth Management, said: “A peace deal between the United States and Iran, if it survives, removes a significant risk to future inflation and while rate-setters will not wish to take anything for granted, evidence suggests inflationary pressures are sufficiently contained at present to avoid having to take interest rates into even more restrictive territory.”
Unemployment rate edges lower
The unemployment rate fell slightly to 4.9% in the three months to April, from 5% in the three months to March, according to figures from the Office for National statistics.
Regular pay — which excludes bonuses — grew at an annual rate of 3.4% in the three months to April. That was unchanged from the three months to March and means that average earnings are still rising slightly faster than prices.
The number of job vacancies has fallen to its lowest level for five years as businesses cut back on recruitment. The number of job vacancies in the March to May period fell to 707,000, the ONS said, the lowest level since February to April 2021.
Liz McKeown, the ONS’s director of economic statistics, said the further drop in job vacancies suggested that “firms are becoming more cautious about taking on new staff”.
The professional services sector saw the largest fall in vacancies, but retail and hospitality also saw significant drops.
Data from HMRC shows that the number of new recruits was at a five-year low, with the number of ‘inflows’, or new hires, just under 540,000 in April – the lowest monthly figure since March 2021.
Ms McKeown said that there were “some signs of workers moving into self employment” against a backdrop of falling vacancies.
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