Bank of England Keeps Rates Steady as It Weighs Iran Truce

• The Bank of England (BoE) kept interest rates on hold at 3.75% in June, as it has since the start of the U.S.-Iran war, judging that it would be premature to raise rates given the uncertainty around the strength of increased inflation pressures.
• The decision came shortly after U.S. President Donald Trump signed a deal with Iran to end the conflict, a development Governor Andrew Bailey said he was “very encouraged” by, although he cautioned that it would not prevent British inflation from rising further. The Monetary Policy Committee voted 7-2 to keep rates steady, in line with economists’ expectations in a Reuters poll.
• The BoE’s cautious approach contrasts with the European Central Bank and Bank of Japan, which both raised rates in the past week, as well as projections from the U.S. Federal Reserve after its first meeting under new chair Kevin Warsh, which showed policymakers expected rates to rise later this year. Following the decision, sterling weakened slightly against the dollar, extending losses after the Fed decision and falling to its lowest level since April 7, while markets continued to not fully price in a BoE rate hike until December.
• While the tentative U.S.-Iran truce promised to reopen the Strait of Hormuz and lower oil prices, which would benefit Britain given its heavy reliance on imported natural gas, Governor Bailey said it was too soon to declare the inflation threat over. He noted that higher energy prices over the past four months had already created inflationary pressure in the pipeline, meaning inflation could still rise even if geopolitical tensions ease.
• The BoE expects inflation to rise above 3.25% in the final quarter of this year, up from 2.8% in May, although this is below the 3.6%-3.7% increase it had projected in April under two of its three main scenarios. The central bank was also marginally more upbeat on growth, estimating that the economy is expanding at an underlying rate of 0.2% per quarter, up from 0.1% in its previous forecasts, despite a small fall in output in April.
• For most policymakers, a weaker labour market, including higher unemployment and slower wage growth than a year ago, reduced the risk that a short-term pick-up in inflation would create longer-term difficulties in returning inflation to target. However, J.P. Morgan pushed back its expected timing for a BoE rate hike to November from July, warning that the central bank could again be wrongfooted by inflation if growth headwinds prove weaker than expected.

(Source: Reuters)