BoE holds Bank Rate as Middle East conflict lifts inflation
The Bank of England's Monetary Policy Committee has maintained Bank Rate at 3.75 percent, despite CPI inflation rising to 3.3 percent in March. Governor Andrew Bailey's letter to the Chancellor attributes the increase primarily to the Middle East conflict.
Conflict fuels inflation surge
The Office for National Statistics reported twelve-month CPI inflation at 3.3% in March, up from 3.0% in February and 0.3 percentage points higher than anticipated.
This increase primarily reflects higher motor fuel prices, driven by increased crude oil costs due to the Middle East conflict.
The conflict has restricted transport through the Strait of Hormuz, pushing up global energy prices.
Average petrol pump prices rose from 130 pence per litre in February to around 157 pence per litre in April, with diesel increasing from 141 pence to 190 pence per litre.
The conflict has also indirectly raised prices for non-energy goods and global agricultural commodities, with agricultural prices up 4.5% since its start.
Key inputs for fertiliser production also saw price increases due to restricted shipping routes.
Outlook darkens, rates held steady
Services inflation, at 4.5% in March, also contributed to the overshoot.
Bank staff now expect CPI inflation to be higher later this year, projected to decline to 3.1% in Q2 before rising back to 3.3% in Q3. This Q3 projection is 1.4 percentage points higher than previously expected, mainly due to increased energy costs.
The indirect effects of higher energy prices are expected to build gradually, raising CPI inflation by around one-third of a percentage point in Q3. The Monetary Policy Committee voted to maintain Bank Rate at 3.75% at its April meeting, committing to return inflation to the 2% target sustainably.