ECB, BoE follow US Fed to hold rates steady
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The news: The European Central Bank (ECB) and the Bank of England (BoE) held rates steady on Thursday, following the US Federal Reserve’s decision to pause rates as rises in global energy prices caused by the US-Iran conflict in the Middle East impacts inflation.
The context: The BoE held rates at 3.75%, with the Monetary Policy Committee voting 8-1 in favour of keeping the rate steady.
BoE governor Andrew Bailey said holding rates was a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East” and said that the bank will continue to monitor the situation and its impact on the UK economy.
“Whatever happens, our job is to make sure that inflation gets back to the 2% target after the initial impact of the war on energy prices has passed”, Bailey said in a press conference on the decision.
The BoE sees third-quarter inflation likely to come in 1.4 percentage points higher than its February forecast, made prior to the war in Iran.
The ECB also left interest rates unchanged at 2%, but signalled that rises may be required at future meetings given the risks to inflation and growth caused by the conflict in the Middle East have intensified.
“The implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects. The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” the ECB said in a statement.
Striking a hawkish tone, ECB president Christine Lagarde said during a press conference on the decision: “We are certainly moving away from our baseline”. The unanimous decision to remain on hold was based on “insufficient information, but a rate hike was also discussed today.”
The US Federal Reserve held rates steady for a third straight meeting in an 8-4 vote on Wednesday, the most divided decision since 1992.
The RBA is expected to lift the cash rate when it meets on Tuesday on the back of higher inflation figures released this week.
