The Bank of England's Monetary Policy Committee (MPC) has kept the Bank rate at 3.75% this month, a decision that was in line with general expectations. However, the vote was split 6-3, with Catherine Mann, Huw Pill, and Megan Greene advocating for a 25 basis point increase. This marks an increase in dissenters compared to June, suggesting that a future rate cut is no longer automatically assumed.
The central point of contention for the MPC is the risk of 'second-round' inflation effects. This refers to the potential for increased energy prices, triggered by the US-Iran conflict, to lead to higher wage settlements and broader domestic price pressures. While members generally agree that substantial disinflation occurred before the conflict and there are few signs of an inflation-wage feedback loop currently, the duration of this reassurance is debated.
The majority of the MPC believes that a subdued economy, spare capacity in the labour market, and tighter financial conditions should help restrain wage growth. They argue these factors offer protection against renewed inflation and allow the MPC to await clearer evidence before tightening policy. Conversely, the dissenting members favour a risk-management approach, suggesting a modest rate increase now could prevent the need for larger rises later if pay rates accelerate.
The Bank's Monetary Policy Report now includes a central projection alongside 'milder' and 'adverse' scenarios for inflation. The central projection anticipates higher energy prices causing near-term inflation and moderate second-round effects, with inflation falling to 1.9% after three years. The adverse scenario, however, projects inflation remaining above target at 2.4% at the three-year mark due to less favourable energy prices and pay pressures.