“The most exciting ‘Hold’ in history,” declared the journalist sitting next to me. Indeed.
The Monetary Policy Committee at the Bank of England has voted unanimously to keep interest rates at 3.75% – warning that the war in the Gulf is putting upward pressure on prices across the UK.
Not so long ago, everyone in the City had a cut penciled in.
This morning, the price of UK natural gas – used by OFGEM to calculate the cap on domestic energy bills – jumped by 15%, following the bombing of the world’s largest LNG plant in Qatar.
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Oil has jumped to over $116 a barrel. On February 27, before the first missile was fired at Iran, it was trading at $72.
An energy price shock of unknowable scale is underway, and the first waves have already reached our shores.
At the pumps, the price of petrol has risen by 10 pence a litre, diesel is up 20 pence – the price of both will climb further in the days ahead.
It’s not clear how long the conflict will last, but the Bank notes that the supply of oil and gas from the Gulf “would take time to recover” even if it ends in short order.
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The targeting of energy infrastructure increases the risk of prolonged disruption.
“War in the Middle East has pushed up global energy prices. You can already see that at the petrol pump scam; if it lasts, it will feed into higher household energy bills later in the year,” Andrew Bailey said. “The best way to tackle this at the source is by reopening energy supply lines.”
Before the war, prices in the UK were stabilising. The Bank was forecasting the headline annual rate of inflation would fade to the 2% target by June and remain there.
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That forecast has been ditched.
The Bank calculates that if energy prices remain elevated, inflation will rise by one percentage point.
Even that calculation, made on Monday 16th, now looks out of date given that energy prices have since risen higher.
Who knows what will happen next?
The Bank points out that prices are rising because the supply of energy has been disrupted, not because demand in the economy is too strong.
That distinction is crucial.
Higher interest rates can’t unblock the Strait of Hormuz. They can’t end the war or revive gas production.
They won’t address the root cause of the problem, but they would increase the cost of borrowing and subdue spending and investment, further weakening economic growth.
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Energy prices have spiked; they could stabilise or sharply reverse if the conflict ends soon.
However, the Bank will feel pressure to intervene if it seems evidence of workers demanding and being awarded higher pay or businesses broadly increasing their prices.
The Bank says it “stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”
Who knows where we’ll be when the MPC next meets in six weeks? The next move could be up as well as down.
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