The Bank of England held its bank rate steady at 3.75% on Thursday, but three of its nine Monetary Policy Committee members voted for an increase to combat inflation stemming from the Iran war. Despite this hawkish tilt, market-implied probabilities for a hike at the next meeting in September have actually declined. The probability of no change rose from 53.6% just before the meeting to 73% by mid-afternoon.
Governor’s View
Governor Andrew Bailey told reporters in London that the Bank was not preparing investors for a future rate hike and expressed comfort that there was little evidence of inflationary pressures from oil prices feeding through to other goods and services. He characterized the split vote as a reasonable divergence of judgments, but noted that the majority saw no second-order effects, even if inflation is expected to rise later due to higher oil prices.
MPC Divisions
Catherine Mann joined Huw Pill and Megan Greene in voting for a rate hike. Mann argued that the collapse of a temporary truce between the US and Iran likely made higher prices unavoidable, necessitating tighter policy. The conflict, initiated by the US and Israel, has led to Iran shutting the Strait of Hormuz, cutting millions of barrels of daily oil production.
Other Business News
US GDP grew at an annualized 1.5%, below expectations. UK borrowing costs hit their highest since the financial crisis. Lloyds Banking Group announced £2bn in additional cost cuts as part of a four-year plan using tech and AI. Eurozone GDP beat forecasts despite the Iran war. London’s FTSE 100 hit a new high, boosted by miners and Rolls-Royce. Shell’s profits doubled in Q2 due to higher oil prices. BAE Systems and Rolls-Royce upgraded profit guidance on surging defence spending. Airbus was fined £6.4m for breaching export controls on sensitive goods. Authorities seized laptops and documents in a crackdown on spam texts related to car finance mis-selling.
