IoD press release  Bank’s caution on rates warranted

“The MPC were expected to vote for a hold today, with just one member – Huw Pill – keen to act early to stem inflationary pressures further out. The Bank’s updated forecasts include several scenarios for the conflict in Iran, incorporating mixtures of conflict duration and inflation persistence. Two of those lift inflation this year by about 1% point to average 3.3%, with the most adverse scenario seeing it rise to 4.5%. Next year’s inflation could be between 1 and 3% points higher. Meanwhile they’ve taken down expected growth for 2026 to 0.7-0.8%, with growth next year tempered to 0.8-1%. All scenarios see unemployment rising to around 5.5% next year – a marked contrast with the 4.0% seen a year after the Ukraine war.

“The contrasts between rising inflation on the one hand, and weakening growth and falling demand for labour on the other, illustrates the Bank’s bind. A weaker economy should reduce the likelihood that inflation expectations push up. But rises in food and energy prices, with heightened sensitivity to both amongst firms and households, could reinforce inflationary forces. The Bank’s focus is largely on how firms respond to the crisis. Its own data suggest firms are mostly expecting to respond to the conflict via a combination of higher prices and lower profits, while expecting to maintain their workforce size. With firms entering this conflict in a more fragile state, the Bank’s caution is warranted.”