LONDON (AP) — The Bank of England warned Thursday about the “highly unpredictable” geopolitical environment as it kept its main interest rate unchanged at the two-year low of 4.25%.
With concerns mounting over the conflict between Israel and Iran, and uncertainty over U.S. President Donald Trump’s tariff agenda, rate-setters at the bank were widely expected to keep borrowing costs on hold as they await developments.
However, the news that three of the nine policymakers on the Monetary Policy Committee voted to cut rates by a quarter of a percentage point has swelled market expectations that rates will be cut again in August.
Minutes to the meeting showed that policymakers were mindful of how the conflict in the Middle East will impact on oil prices, which have risen sharply in recent days to over $75 a barrel.
The prevailing view at the bank was that inflation, which currently stands at 3.4%, would remain high over the coming months but start to head back towards next year especially as unemployment has started to rise, a development that can keep a lid on wage demands and hence lower inflation. The uptick in oil prices has the potential to offset that.
“Interest rates remain on a gradual downward path, although we’ve left them on hold today,” bank governor Andrew Bailey said. “The world is highly unpredictable.”
Since its first quarter-point rate cut last August from the 16-year high of 5.25%, the Bank of England has played it steady, reducing interest rates every three months. That would mean the next reduction is in August.
Economists believe that remains the most likely outcome but cautioned that geopolitical events could prompt a reassessment.
“Further escalation of the conflict in the Middle East could push up on U.K. inflation, which could see the Bank move more cautiously,” said Felix Feather, an economist at asset management firm Aberdeen.
The cuts have come even though inflation has been above the bank’s target rate of 2% for most of that time. Rate-setters can’t do much about current inflation so set policy on a longer-term horizon, such as over two years.
Uncertainty over the level of tariffs U.S. President Donald Trump will impose around the world is also clouding the outlook for prices around the world. Though the U.K. looks like it will be spared a raft of tariffs, the backdrop for the global economy remains highly uncertain.
The tariff issue is at the forefront of concerns at the U.S. Federal Reserve, which on Wednesday kept its key rate unchanged, to the chagrin of Trump, who has been urging the central bank to join others, such as the Bank of England and European Central Bank, and cut borrowing costs.
