BOE holds rates at 3.75%, warns Iran war may need forceful rate hikes

The Bank of England held interest rates at 3.75 per cent and flagged risks to inflation from the Iran conflict, particularly through higher energy and food costs

The Bank of England kept interest rates on hold at 3.75 per cent on Thursday and set out scenarios for the economic impact of the Iran war, one of which could require a "forceful" increase in borrowing costs.

 

Below are key comments made by Governor Andrew Bailey at the press conference on Thursday.

IMPACT ON ENERGY, FOOD PRICES

"Where we go from here will depend on the size and duration of the shock to energy prices itself driven by how the conflict in the Middle East evolves and how those higher energy prices affect consumer prices in the United Kingdom."

 

 

"The indirect effects on the inflation are likely to be largest for food prices since food production and distribution are energy intensive."

SECONDARY EFFECTS

"Second round effects could arise, for example, if a rise in inflation expectations leads workers to bargain more strongly for wage increases and firms raise wages to maintain real pay for their employees, which in turn would increase their costs and could lead them to set higher prices."

 

"The uncertainty of the situation is likely to weigh further on firms investment intentions. In addition to being highly uncertain, second-round effects build more slowly than direct and indirect effects that leaves monetary policy with a difficult judgement call."