LONDON, April 30 (Reuters) – The Bank of England kept interest rates on hold at 3.75% 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.
ON DIRECTION OF BANK RATE IN FUTURE
“I would very much give the message: no, it is not the case that we’re sort of giving some sort of slightly clandestine message, that interest rates are going to go up notwithstanding what we’ve decided today, … today is an active hold.”
“Given the sheer unpredictability and drawing on the evidence from Scenario B, there’s a good case for holding rates now, but we must recognise that a prolonged spike in energy prices, as in Scenario C, could lead to a higher bank rate.”
“I can’t give you a cast iron assurance that therefore there will be no increase (in bank rate) in any scenario or any of those scenarios … What I can say to you is that there is a good, good deal of space available to accommodate that (inflation pressures).”
“The right decision today is to hold, but it’s an active hold …it’s not a passive, ‘wait and see’ hold…It’s to deliberately, actively hold.”
“Do I think therefore that the interest rate curve is in the wrong place? No, I don’t, because there are risks around this.”
ON TIMING OF ANY RATE CHANGES
“It would be a mistake to wait to see the second round effects before acting because then it would be too late…it’s a judgment that we will have to make at every meeting.”
IMPACT OF WAR 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.”
RISK OF SECOND ROUND INFLATIONARY IMPACTS
“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.”
“Now it will, I should say, be some time before, before we really do get a read on pay, and the reason is the seasonal cycle of pay setting.”
(Reporting by UK Bureau)
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