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Bank of England Holds Key Rate Steady Amid Energy Price Uncertainty from Middle East War

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Bank of England Holds Key Rate Steady Amid Energy Price Uncertainty from Middle East War

The UK central bank left its key rate unchanged at 3.75% as it continues to assess inflation risks while noting a decline in global energy prices after the US and Iran reached a preliminary agreement to end the war in the Middle East.

The Bank of England's Monetary Policy Committee voted by a majority of 7-2 in favor of a hold at its June meeting, with two members voting for a 25 basis-point increase to 4%, according to a Thursday release. The dissenters, Chief Economist Huw Pill and external member Megan Greene, were "less confident" than other committee members over the pace of the underlying UK disinflation prior to the war and expressed concerns over "significant" uncertainty regarding the extent of second-round effects from the energy price shock caused by the conflict.

At the central bank's previous meeting in April, Pill also voted against maintaining the bank rate and called for hiking the rate by 25 basis points, citing "clear upward shift in risks" to achieving the BoE's medium-term inflation target of 2%.

Based on the latest data from the Office for National Statistics, the annual inflation rate in the UK stood at 2.8% in May, unchanged from the previous month, with the core rate, which excludes energy prices, ticking up to 2.6% from 2.5%.

"There has been a marked fall in energy prices in recent days, reflecting progress on talks involving US and Iran. But the situation remains unpredictable, and there is clearly a risk that energy prices remain elevated for an extended duration. Recent inflation outturns give greater confidence that gradual underlying disinflation has continued. Labour market data show some further softening, and there are further signs of demand weakness," BoE Governor Andrew Bailey said.

"Given the context at present of softness in the real economy and uncertainty around the scale and duration of the shock to energy prices, tolerating temporarily above-target inflation as part of a return to target is an appropriate way to approach the trade-off, providing inflation expectations remain contained."

The committee said it will continue to closely monitor the situation in the Middle East, along with the impact of the energy price shock on the UK economy and the inflation outlook. It also reiterated its readiness to act to ensure that the BoE reaches its inflation target.

"There's nothing in today's decision that changes our mind that the next move is likely to be a rate cut in 2027. It feels like it would take a lot for the five more neutral-to-dovish members of the nine-strong committee to vote for a hike, barring the Iran deal falling apart and energy prices moving materially higher," ING said in a note.

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