{"id":645300,"date":"2026-05-02T17:09:34","date_gmt":"2026-05-02T17:09:34","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/645300\/"},"modified":"2026-05-02T17:09:34","modified_gmt":"2026-05-02T17:09:34","slug":"why-bank-kept-interest-rates-on-hold-despite-message-for-uk-to-brace-itself-for-trumpflation-interest-rates","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/645300\/","title":{"rendered":"Why Bank kept interest rates on hold despite message for UK to brace itself for Trumpflation | Interest rates"},"content":{"rendered":"

The message to the UK\u2019s crisis-weary households from the Bank of England<\/a> is: brace yourself for Trumpflation \u2013 and the higher interest rates it may yet take to rein it in.<\/p>\n

Reading the Bank\u2019s quarterly monetary policy report, it is not difficult to understand the fury Rachel Reeves expressed while in Washington this month<\/a> at the \u201cfolly\u201d of the US president\u2019s war on Iran \u2013 its economic consequences will hit the UK hard.<\/p>\n

As a result of the conflict and the resulting rise in oil and gas prices, the Bank reckons average mortgage repayments are to rise by \u00a380 a month; food price inflation could hit 4.6% by the autumn; and utility bills will jump in July and remain high into the winter.<\/p>\n

Overall inflation is now expected to peak above 3.5% by the end of this year: more than a percentage point higher than the Bank\u2019s pre-war forecasts. In its worst-case \u201cscenario C\u201d, in which oil prices hit $130 a barrel and remain there for a prolonged period \u2013 alarmingly plausible given Donald Trump\u2019s latest erratic pronouncements \u2013 inflation peaks above 6%.<\/p>\n

A chart showing daily fluctuations in the price of Brent crude since 25 February<\/a><\/p>\n

In this higher oil price world, interest rates may have to be raised by more than 1.5 percentage points, to at least 5.25%.<\/p>\n

Despite this inflation shock, monetary policymakers have opted not to raise rates yet<\/a>, with the Bank\u2019s hawkish chief economist, Huw Pill, the only dissenter on the nine-member committee. But their reasons are hardly comforting, pointing to the weakness of the UK\u2019s battered economy in the face of this latest crisis.<\/p>\n

The rate-setters\u2019 main concern is not the energy price shock, which they cannot alter; but \u201csecond-round effects\u201d, under which firms raise prices and workers negotiate pay rises, to offset higher costs, causing inflation to be embedded in the wider economy.<\/p>\n

A chart showing interest rates since 2005<\/a><\/p>\n

With GDP growth now expected to be a lower-than-expected 0.8% this year, continued weakness in the jobs market is likely to make it tricky if not impossible for employees to win themselves higher salaries \u2013 unemployment is expected to peak at 5.5% next year, even under the Bank\u2019s more benign scenarios. At the same time, policymakers believe cautious consumers will prevent retailers pushing up prices aggressively.<\/p>\n

As Threadneedle Street\u2019s governor, Andrew Bailey, put it in his personal paragraph of the meeting minutes, \u201cfor now, the softer real economy makes it appropriate to maintain Bank rate\u201d.<\/p>\n

Another reason for inaction for the moment is that financial markets have already done some of the Bank\u2019s work for it \u2013 with borrowing costs already more than half a percentage point higher than before the Middle East conflict began, the equivalent of two rate rises.<\/p>\n

In his press conference, Bailey stressed that this market \u201cheadroom\u201d, might allow the monetary policy committee (MPC) to hold off from rate rises. He appeared to strike a more dovish tone than the monetary policy report, which pointed to the need for perhaps two increases, even in the Bank\u2019s more benign scenarios, A and B, in which oil prices fall back fairly rapidly.<\/p>\n

\u201cI can\u2019t give you a cast iron assurance that therefore there will be no [interest rate] increase in any scenario or any of those scenarios. But what I can say to you is that there is a good deal of space available to accommodate that\u201d Bailey said.<\/p>\n

However, other MPC members may fear that this market effect \u2013 at least in part a bet on higher rates \u2013 could yet reverse, if it is not validated by action from the MPC at some point in the coming months.<\/p>\n

Even some of the most dovish MPC members, including the external trade expert Swati Dhingra, expressed a readiness to consider raising rates; though she said there was \u201ca limit to how much output loss should be acceptable\u201d \u2013 in other words, how much the MPC should be willing to clobber growth, to wrest inflation back under control.<\/p>\n

And that is the bleak truth underlying the Bank\u2019s unenviable task in the months ahead. Policymakers will have to weigh the relative risks of two powerful forces unleashed by the Middle East conflict: higher inflation, and weaker growth \u2013 and both will make life for cash-strapped British households feel much harder.<\/p>\n","protected":false},"excerpt":{"rendered":"The message to the UK\u2019s crisis-weary households from the Bank of England is: brace yourself for Trumpflation \u2013…\n","protected":false},"author":2,"featured_media":645301,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-645300","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/645300","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=645300"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/645300\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/645301"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=645300"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=645300"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=645300"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}