LONDON, Sept. 18 (Xinhua) -- The Bank of England (BoE) on Thursday kept its benchmark interest rate unchanged at 3.75 percent, as surging global energy prices pushed up inflation and raised the prospect of further price pressures in Britain.
According to the bank, global energy prices had risen significantly since the July Monetary Policy Report and remained volatile. Spot prices of Brent crude and British wholesale gas had risen by 36 percent and 78 percent, respectively, since the period leading up to the July Report, it said.
Data released by the Office for National Statistics on Wednesday showed that Britain's consumer price index (CPI) rose 3.1 percent year-on-year in August, up from 2.9 percent in July. On a monthly basis, motor fuels made the largest upward contribution.
The bank expected CPI inflation to rise further to around 3.75 percent in the last quarter of 2026 and to reach slightly above 4 percent in the first quarter of 2027, based on energy prices at the close of business on Monday.
The bank said the monetary policy was being set to ensure inflation comes down to 2 percent sustainably as the economy adjusts to the energy shock. The policy stance required to achieve this will depend on the scale and duration of the shock and how it feeds through the economy.
So far, higher global energy costs have had "a limited effect" on price and wage-setting in Britain, said Andrew Bailey, governor of the BoE. But he also noted that "the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise bank rate to ensure that inflation falls back to our 2 percent target."
The decision to hold the interest rate came as the BoE's Monetary Policy Committee voted 6-3, with three members voting to increase the rate by 0.25 percentage points to 4 percent.
"Monetary conditions in this country have tightened quite a bit this year because we were expected to cut rates and we haven't," Bailey said.
The bank also noted that, given the time it takes for inflationary pressures to spread, it should not wait too long for evidence that inflation was becoming more entrenched in the economy before raising interest rates.
However, analysts warned that raising interest rates in the near future could place additional financial pressure on households and businesses.
James Smith, chief economist at the Resolution Foundation, said that "while there was welcome news on the cost of borrowing, the outlook on the cost of living was sobering," noting that the BoE's forecast of a 24 percent rise in the energy price cap in January would send bills soaring during the coldest months of the year, while 4 percent inflation would sharply shrink pay packets in real terms.
William Ellis, senior economist at the Institute for Public Policy Research, said although the BoE held interest rates as expected, there is pressure for higher rates later this year following increases in Europe and the United States.
Calling higher interest rates "the wrong tool" for the economic shock, Ellis said: "This is not British inflation, but the war in Iran arriving on British bills. No interest rate change can lower global energy prices."
"Families face the most expensive winter since 2022/23", and "risk being hit twice -- first on their energy bills, and then on their mortgages," he said.
He also called on the government to announce a temporary ceiling on household energy bills if the conflict does not de-escalate quickly in order to limit inflation at source, reduce pressure for higher interest rates, and stop a temporary shock from doing lasting damage to living standards.
David Bharier, deputy director of Economics and Insights at the British Chambers of Commerce, also expressed concern that the BoE may face increasing pressure to show action as the Federal Reserve and European Central Bank both raised interest rates in recent days.
Increasing the cost of borrowing does nothing to change the costs of doing business, hiring or imported energy, and the difference from the 2022 price crisis is that firms are now far less able to absorb further wage increases, he said.■
