By William Schomberg and David Milliken
LONDON, March 19 (Reuters) - The Bank of England's nine interest rate-setters voted unanimously to keep borrowing costs on hold in the face of inflation risks from the war in the Middle East, and some raised the prospect of raising rates.
The BoE's Monetary Policy Committee voted 9-0 to keep Bank Rate at 3.75%, the central bank said on Thursday.
Economists polled by Reuters had mostly expected a 7-2 vote in favour of a 'hold' decision.
The MPC said inflation could
rise to as high as 3.5% over the next two calendar quarters, according to BoE staff forecasts and that it was alert to the risk of higher inflation expectations getting embedded in the economy.
It also nodded to the risks of an economic slowdown which could weaken inflation pressures but said the bigger risk was one of higher inflation.
BoE Governor Andrew Bailey said petrol prices were already higher and household energy bills would go up later this year if the conflict lasts.
"We have held interest rates at 3.75% as we assess how events unfold," he said in a statement. "Whatever happens, our job is make sure inflation gets back to its 2% target."
DIFFERENCES WITHIN MPC OVER RATES OUTLOOK
Other MPC members were more explicit about whether interest rates might need to go up, a possibility that has been priced in by investors after the start of the war.
Catherine Mann said she thought the BoE should consider a longer pause in rates "or even a hike some point" to stop inflation from getting stuck too high.
BoE Chief Economist Huw Pill, who voted against the BoE's most recent rate cuts, said he was "ready to act" if the energy price shock raised the risk of longer-term inflation pressures.
But Alan Taylor, who has been one of the most vocal supporters of rate cuts, said the BoE's decision to hold rates should not be seen as a turning point.
"Given massive uncertainty around energy prices, I currently see a high bar to hiking," Taylor said.
The MPC said it might have more information by the time of its next meeting in late April to better assess the situation.
"There was a range of possibilities for how monetary policy might need to respond to different developments and risks," it said.
The BoE has cut borrowing costs more slowly than the European Central Bank since 2024 because of its worries about Britain's stubbornly stronger price pressures.
Just when it looked like British inflation was going to drop to the BoE's target of 2% and stay there, the jump in oil and gas prices threatens to push it back up, possibly to 4-5% according to analyst forecasts based on recent energy prices.
That would still be far below the peak of 11.1% in 2022 after Russia's full-scale invasion of Ukraine which caused a much bigger spike in energy prices.
Last month, investors had been betting that the BoE would cut rates twice this year. But on Thursday, after news of further damage to energy infrastructure in Qatar, they were fully pricing in a rate hike by the end of the year and also a possible second one.
Most economists think a pause over some months in the BoE's run of rate cuts is more likely than a full U-turn to hikes given the fragile state of the UK economy.
INFLATION RISK COMES WITH ECONOMY WEAK
Data published earlier on Thursday showed British wages rose at their slowest pace since late 2020 in the three months to January, potentially easing some of the BoE's inflation worries.
The BoE noted the Iran war was taking place at a time when Britain's economy was growing only weakly.
But it showed it was not relaxing its guard on inflation pressure, noting fresh survey data from its regional agents which showed pay settlements in 2026 were likely to be 0.2 percentage points higher than its forecast at 3.6%.
On Wednesday, the U.S. Federal Reserve held interest rates steady and projected a single reduction in borrowing costs this year although Chair Jerome Powell said uncertainty was high.
The ECB, is meeting on Thursday, is also likely to tread warily due to the war.
((Writing by William Schomberg; william.schomberg@tr.com))
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(Writing by William Schomberg; william.schomberg@tr.com)
