Bank of England holds interest rates at 3.75% but hints at future hikes

Andrew Prosser, head of investments at InvestEngine, said: “Markets were pricing in a 95 per cent chance of no rate change ahead of today’s meeting, and that’s exactly what we got, with the Bank of England leaving the base rate at 3.75 per cent.

“The vote was 8-1 in favour of holding, with chief economist Huw Pill the only member of the Monetary Policy Committee (MPC) backing an immediate hike.

“That said, the message from the MPC was far from relaxed.

“Several members made clear they could support higher rates soon if energy prices remain elevated, while governor Andrew Bailey described holding rates as a “reasonable place” to be, given the softness in the UK economy.

“The big issue is uncertainty. The conflict in Iran has made the inflation outlook much harder to judge, to the point that the Bank scrapped its usual central forecast and instead set out three scenarios based on energy prices and potential second-round inflation effects.

“In the scenario several policymakers see as most likely, inflation peaks at 3.7 per cent by the end of the year.

“But the more severe case has inflation reaching 6.2 per cent in early 2027 and staying above the Bank’s two per cent target throughout the forecast period.

“Oil prices have already moved close to the Bank’s most pessimistic assumptions, while higher fuel costs and expected increases in household energy bills are adding further pressure.

“For the UK, this is particularly uncomfortable given its reliance on imported energy.

“So while today’s hold was widely expected, the direction of travel still looks finely balanced.

“Markets are now pricing in two to three quarter-point hikes from the Bank this year, with the first potentially coming as soon as June, even as recession risks and a weakening labour market continue to build.”