Bank of England Expected to Hold Rates Amid Mideast Tensions
Royal Bank of England is not likely to change its existing rate of interest this week as rising tensions of geopolitics in the Middle East have provided a new-found uncertainty to all world markets. The central bank is playing it safe because the UK continues to experience high inflation, with prices of oil rising steeply.
The core of the issue is the growing tension between Israel and Iran, a conflict that analysts fear would drag the United States deeper in the conflict. The resultant volatility of the energy sector and especially the oil markets has already got the price of the Brent crude Skyrocketing beyond the 75 dollars per barrel mark- a steep rise that will most likely lead to further rise in consumer prices and jeopardize the objectives of controlling inflation.
It is likely that the base interest rate is left down at 4.25% its lowest position in two years, by the monetary policy committee (MPC) composed of nine members which are expected to announce the same on Thursday. Over the last year, the MPC has been making rate decisions tentatively, and has also changed its policy compared to the previous quarter only every three months, and has kept the rhythm constant even when it had to contend with local and global fluctuations.
Geopolitical Risk Takes Centre Stage
Although the Bank of England has in the past shown that inflation is being experienced on a gradual declining path, the recent case of the rampage in the oil prices puts this in jeopardy. The current rate of inflation is 3.4 percent which is quite high in comparison to the inflation target by the Bank which is 2 percent. The continuing upward trend of energy prices may also postpone the achievement of target inflation further and force the bank to rethink the immediate reduction of the rates.
Sandra Horsfield, a senior economist at Investec, said: The energy risk has now become one of the largest points under discussion in monetary policy. The Bank will not have the desire to make a move that will be early as long as the oil prices are uncertain.
Tariffs and Trade Shadows Loom Large
To top this, the world trade environment may factor in especially in relation to American tariffs as espoused by President Donald Trump and his make America first economic attitude. Whereas the UK has not yet directly faced any threats of tariffs yet, global supply chains, and current pricing mechanisms are still vulnerable to the decisive alterations in U.S. policy, which results in the financial projections of many economies being impacted long past the shoreline of the United States.
The Federal Reserve, which has been combating inflation and lack of jobs on its own front suffered a setback on Wednesday when it decided not to adjust its main interest rate. President Trump is said to be infuriated by this move since he has been vociferous in demanding the Federal Reserve to ease interest rates in order to foster economic growth. This policy achievement by the Fed is comparable to the hesitant policy of its counterpart, the Bank of England, and indicates a more general policy beyond the financial crisis of major central banks, which hesitates to alter what is going on in turbulent times.
This is largely despite the expectations of rate decrease by some observers of the market to make taking of loans to be more affordable and boost economic growth but the general opinion seems to suggest that the easing of the monetary policy will probably be deferred to August as has been the case with the semi-annual downturn of the rates over the last couple of quarters of the Bank. In May, the Bank of England made its last rates cut and the gradual decline has been in progress ever since the high rate of 5.25% was recorded in the bank some 16 years ago.
According to analysts, the Bank will not undertake any more action unless the inflation declines drastically or the crisis in the Middle East is resolved conclusively.
August may be the next opportunity that the Bank will have on reconsidering easing in case inflationary pressures subside and the geopolitical risk factor goes down in the course of two months. Nonetheless, authorities have made it clear that such a step would be preceded by actual numbers, not estimates.
It seems that the UK economy is currently in an act of balance – on the one hand, it has to keep inflation down, and, on the other hand, it has to maintain economic strength in the face of international strife.
