IoD press release MPC in wait-and-see mode as energy prices spike higher
Commenting on the unanimous decision of the Monetary Policy Committee of the Bank of England to hold interest rates at 3.75%, Anna Leach, Chief Economist at the Institute of Directors, said:
“The outbreak of conflict in the Middle East has re-framed the inflation landscape, both globally and in the UK. At this point, oil prices are closing on their 2022 peak, while gas prices are at around a quarter of their level at that time. With such significant rises and market volatility, it’s no surprise to see a unanimous vote from the MPC for a rate hold while they assess the situation.
“The growth and inflationary impacts from the conflict come down to the significance of the energy supply and other market disruptions and their duration. Ahead of the attack on Qatar’s gas field, the IEA had already described the energy supply disruption as “unprecedented” making it inevitably difficult for forecasts of impact to be precise. Nonetheless, the Bank expect inflation to be up to 1.5% points higher by Q3 than they predicted in February, reaching 3.5%.
“Ideally the MPC would look through this type of cost shock. But with household and business expectations for inflation remaining stubbornly elevated, risks remain from higher inflation becoming imbedded in the system. Arguably the risks from second-round inflationary effects this time are lower. The economy is markedly weaker compared with the outset of the Ukraine war, with unemployment higher and private sector wage growth closing on 3%. These are not strong conditions for either wage growth to track higher or for businesses to be able to pass through costs via prices.”
