IoD press release  Unresolved Middle Eastern conflict sets path to higher interest rates

“The MPC were again expected to vote for a hold today, with the same three dissenters from that position as last time. The minutes really highlight just how complicated the MPC’s balancing act is becoming. On the one hand, they note that there is still little sign that price pressures are spreading across the economy, that services price inflation – a key indicator of domestic price pressures – has dropped further and that financial conditions have already tightened anyway (the language of “full and fast” pass-through is striking). But on the other hand, growth has been stronger than expected, energy prices are closing on the adverse scenario and, if higher prices persist, inflation is expected to exceed 4% just as the majority of wage negotiations are underway – a rate at which inflation risks start rising more sharply.

“The language of the minutes is striking. Back in July, the MPC judged the risk of strong inflationary pressures as greater than the risk of weak ones. Their outlook for the Middle East conflict has moved towards the adverse scenario and the risk of second-round effects has increased. There’s mention too of further pressures from AI supply constraints and El Nino. Economic conditions are certainly getting tougher and that sharpens the need to keep the forthcoming Budget laser focussed on reinforcing the decisions which will deliver growth.”