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Members of the Bank of England’s Monetary Policy Committee on Thursday said continued strength in energy prices could mean an increase in interest rates may be needed. The BoE laid out three scenarios for the UK’s economic outlook as it assesses options for monetary policy amid the Middle East crisis and energy price shock. In its April Monetary Policy Report, the BoE said the scenarios help to illustrate a range of possible outcomes for the UK economy and weigh differing paths for energy prices and the extent of any second-round effects on domestic price and wage-setting. Across these three scenarios, inflation is higher in the near term than the central projection in the BoE’s February report. At the time, the BoE forecast CPI inflation to return to the 2% target this year and remain around that rate in the medium term. On Thursday, the BoE said larger and more persistent rises in global energy prices are judged to be likely to lead to bigger second-round effects on inflation. This would mean monetary policy stance would need to be tighter on average. Under Scenario A oil peaks at $108 per barrel this year before falling to below $80 per barrel by 2027 first quarter. In B, the oil price hits the same peak but remains elevated for longer, while in C, the oil price soars to $130 per barrel. BoE Governor Andrew Bailey said he places most weight on scenario B, albeit with slightly reduced second-round effects. ‘I place some weight on Scenario C, which would require a stronger monetary policy response. For now, the softer real economy makes it appropriate to maintain bank rate,’ he added. Deputy Governor Sarah Breedon placed most weight on B and did not see C as ‘likely’. ‘But if it were to materialise, I would stand ready to react, forcefully if necessary,’ she added. Swati Dhingra said all scenarios are in play. ‘If the situation were to worsen, this may warrant some tightening, but there is a limit to how much output loss should be acceptable,’ she added. Megan Greene said an increase in bank rate ‘may be necessary’ in upcoming meetings. ‘We may end up with inflation somewhere between Scenarios B and C, necessitating a tighter stance,’ she suggested. Clare Lombardelli placed more weight on the economy evolving as in B, but said C is ‘plausible’, and ‘would require policy to respond more forcefully to inflationary pressures.’ Catherine Mann said: ‘Should I see continued rising inflation outturns and expectations, I would expect to increase bank rate so as to lean against inflation rising into 2027.’ While Deputy Governor Dave Ramsden said he would ‘consider raising bank rate and accepting a larger output gap as a result,’ under scenario B. Alan Taylor placed more weight in the zone between A and the path with standard treatment, where conflict subsides and energy prices moderate to year-end. ‘This would entail a hold for some time, then a move to a neutral or accommodative stance,’ he said. BoE Chief Economist Huw Pill, the sole dissenter in Thursday’s vote, argued for a quarter point interest rate increase. ‘As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in bank rate will help mitigate upside risks to price stability stemming from a re-emergence of intrinsic inflation persistence,’ he said. The comments came as the BoE’s MPC voted 8-1 to leave bank rate on hold at 3.75%. The central bank last cut rates in December, keeping rates on hold at its February and March meetings. In a statement, the MPC said the conflict in the Middle East means that prospects for global energy prices are highly uncertain. While monetary policy cannot influence energy prices it ‘will be set to ensure that the economic adjustment to them occurs in a way that achieves the 2% inflation target sustainably,’ the statement added. ‘The policy stance required to achieve this will depend on the scale and duration of the shock, and how it propagates through the economy,’ it continued. The MPC highlighted the risk of ‘material’ second-round effects in price and wage-setting, which policy would need to lean against, while accepting loosening labour market and a weakening economy could contain inflationary pressures. ‘Taking all the risks to the economic outlook into account, the Committee judges that it is appropriate to maintain Bank Rate at this meeting,’ the MPC said. The MPC said it stands ‘ready to act’ as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term. Copyright 2026 Alliance News Ltd. All Rights Reserved.
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