The nine men and women of the Bank of England’s Monetary Policy Committee emerged from their deliberations in Threadneedle Street this month with a decision that was both expected and yet deeply uncomfortable. The base rate remains anchored at 3.75 percent. It is a hold, a pause, a moment of stasis in a cycle that has been anything but static. But the minutes of the meeting and the subsequent press conference from Governor Andrew Bailey painted a picture of an institution trapped between a rock and a hard place, with the rock being a fresh energy price shock and the hard place being a comatose domestic economy.
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The culprit for the Bank’s current discomfort lies thousands of miles from the rainy streets of London. The conflict in the Middle East has sent tremors through the global energy complex. While the UK is not directly dependent on Iranian oil in the way some European nations are, the law of global commodity markets is an unforgiving one. Fear and disruption in the Strait of Hormuz translate directly into higher prices for Brent crude, which in turn flows straight into the cost of filling up the family car and heating the home. The Bank of England’s own forecasts have had to be hastily rewritten to account for this external shock. Inflation, which had been gradually and painfully trending downwards towards that elusive two percent target, is now expected to spike back up towards 3.5 percent in the third quarter of the year. This is the “second-round effect” that keeps central bankers awake at night: the fear that higher energy costs will embed themselves in the wage bargaining process and create a self-perpetuating inflationary spiral.
