Bank of England governor warns UK public to expect higher costs this year

Two members of the monetary policy committee voted for a quarter-point rise but Bank argued that rapid reaction risked creating volatility. Photograph: Tolga Akmen/EPA View image in fullscreen Two members of the monetary policy committee voted for a quarter-point rise but Bank argued that rapid reaction risked creating volatility. Photograph: Tolga Akmen/EPA Bank of England governor warns UK public to expect higher costs this year Andrew Bailey says ‘inflationary pressure in pipeline’ despite US and Iran signing initial peace deal as interest rates kept on hold Business live – latest updates The governor of the Bank of England has warned consumers to expect higher costs this year as a result of the conflict in the Middle East, despite falling oil prices as the US and Iran signing an initial peace deal. Speaking after the Bank kept interest rates on hold at 3.75%, Andrew Bailey said there was “still some inflationary pressure in the pipeline” after the conflict pushed up energy prices. Seven of the Bank’s nine-person monetary policy committee voted to keep the base rate unchanged as the MPC weighed the threat of higher inflation against the prospect of an economic slowdown. Two members voted for an immediate rise, indicating the risk that borrowing costs could soon increase. Donald Trump’s agreement with Tehran has brought oil prices down rapidly in recent days. Figures released on Wednesday showed UK inflation was more muted than feared , at 2.8% last month. View image in fullscreen Ships near the strait of Hormuz, whose effective closure has impacted oil and gas supplies. Photograph: Reuters The Bank of England now expects the impact of the conflict on UK inflation to be less dramatic than first thought, with the consumer prices index (CPI) rising to about 3.25% in the final quarter of this year – lower than in any of three scenarios it laid out last month. That is still well above the Bank’s target of 2%. Bailey, explaining his vote to keep interest rates on hold, said a rapid reaction to rising inflation carried a risk of “undesirable volatility”, but he suggested that the current weakness of the economy – including the jobs market – should help to contain the risk of inflation becoming entrenched. “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,” Bailey said. He added: “Oil prices have fallen in recent days, and that’s encouraging. But they’re still higher than before the war. Whatever happens in the future, the higher energy prices of the past four months mean there’s already some inflationary pressure in the pipeline.” The governor said the Bank would attempt to ensure that inflation did not stay above its 2% target for a sustained period. The pound fell to a 10-week low of $1.32