The Bank of England has left interest rates on hold but warned that 'higher inflation is unavoidable' due to the conflict in the Middle East, with households told to brace for 'Trumpflation'. The Bank's quarterly monetary policy report highlights that average mortgage repayments could rise by £80 a month, food price inflation may hit 4.6% by autumn, and utility bills will jump in July.
Overall inflation is now expected to peak above 3.5% by the end of the year, more than a percentage point higher than pre-war forecasts. In a worst-case scenario where oil prices hit $130 a barrel and remain high, inflation could peak above 6%, potentially requiring interest rates to rise by more than 1.5 percentage points to at least 5.25%.
Despite this, the Monetary Policy Committee voted 8-1 to hold rates, with only chief economist Huw Pill dissenting. The Bank's main concern is 'second-round effects' where firms raise prices and workers seek pay rises, embedding inflation. However, weak GDP growth of 0.8% this year and rising unemployment expected to peak at 5.5% next year may limit wage increases.
Governor Andrew Bailey noted that 'the softer real economy makes it appropriate to maintain Bank rate' for now. Financial markets have already raised borrowing costs by more than half a percentage point since the conflict began, providing some 'headroom'. Bailey said there is 'a good deal of space' to accommodate potential rate rises, but could not guarantee no increase.
Even dovish MPC member Swati Dhingra expressed readiness to consider raising rates, though she cautioned about the limit of acceptable output loss. The Bank faces a bleak trade-off between higher inflation and weaker growth, both of which will worsen the financial strain on UK households.
