Bank of England warns inflation could rise to 6.2% as it holds interest rates steady | Analysis from AJ Bell’s Danni Hewson

The Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to hold interest rates at 3.75%, with Bank’s chief economist Huw Pill voting to hike earlier today. In its inflation estimates, the Bank also warns that the energy price shock could lift UK inflation to 6.2%.

Danni Hewson, AJ Bell head of financial analysis, comments on the latest Bank of England interest rate decision as follows:

“There’s an awful lot of choppy water between now and the Bank of England’s next rate setting meeting in June, which will undoubtedly have been a factor in chief economist Huw Pill’s lone vote to raise interest rates today.

“Other members of the MPC chose to maintain a wait and see approach. But with the oil price hitting a four-year high this morning, the potential that inflation could surge to an uncomfortable 6.2% by early next year has already pushed market expectation of a hike in June to around 50%, according to LSEG Refinitiv data.

“No one wants to see inflation insidiously wrap itself into the fabric of the UK economy once again, especially as the labour market in particular is in a very different place to where it was the last time the Bank lifted the base rate. That looser labour market should help prevent significant wage increases, which were a major factor in why the last brush with inflation was nowhere near as ‘transitory’ as had been anticipated by central bankers.

“But that will be cold comfort for UK households anticipating another expensive winter. Even though the second-round effects are expected to be more modest, they add to the strain already being felt by inflation weary families.

“There is a great deal of uncertainty about what is going to happen in the coming weeks, and the IMF has warned central bankers not to rush to hike rates at a time when global growth is incredibly fragile.

“Until the Iran war, the inflationary path had been downhill. This period could ultimately turn out to be a pause in the rate cutting journey, rather than an about turn that would impact both consumer and business sentiment.

“There are consequences of getting this wrong, but the unpredictability of the US administration means decisions are being taken in the dark. It’s incredibly difficult to see the clouds on the horizon, let alone figure out how bad the coming storm may be.”