Both the Bank of England (BoE) and the European Central Bank (ECB) kept their benchmark interest rates steady on Thursday, joining peers including the Federal Reserve (Fed) and the Bank of Japan (BOJ) as policymakers continue to weigh risks from the ongoing conflict and blockade in Iran.
The Monetary Policy Committee (MPC) in Britain voted 8-1 to keep the BoE's benchmark rate at 3.75% as only Chief Economist Huw Pill sought a hike to 4.0%, in line with expectations in a Reuters poll of economists.
A day after the Fed kept rates on hold and shortly before the European Central Bank left rates unchanged too, the MPC said it would continue to closely monitor the situation in the Middle East.
Sterling weakened slightly against the U.S. dollar and the euro. Two-year British government bond yields, which are sensitive to speculation about BoE rates, fell by around 5 basis points, and investors dialled back on their bets on three BoE rate hikes this year.
BoE Governor Andrew Bailey said the central bank would face a "difficult judgment call" on whether to raise rates, as waiting for conclusive evidence would leave things too late.
Holding rates at 2%, the ECB did not surprise as it also held interest rates steady and warned of growing risks to the growth and inflation outlook due to the war in the Middle East.
Energy costs have spiked since the near-total closure of the Strait of Hormuz, through which about a fifth of the world's oil and gas usually passes, following the outbreak of the U.S.-Israeli war against Iran.
Eurozone inflation is already picking up – it jumped to 3% in April, above the ECB's 2%, but concerns about inflation have to be balanced against the risk of curbing lackluster growth by making borrowing more expensive.
"The upside risks to inflation and the downside risks to growth have intensified," the ECB said in a statement announcing its decision.
"The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy," it said.
Ahead of the meeting, analysts had expected the ECB to keep its key deposit rate at two percent, where it has been since June last year, as the bank waits to see how the war plays out.
Italian bank UniCredit wrote in a note that it did not "see the urgency" for the Frankfurt-based institution to act, particularly as inflation was around the ECB's target before the conflict.
"The weakening of the outlook for demand, particularly for private consumption, reinforces the case for the ECB to be patient," it said.
Eurozone economic growth slowed to 0.1% in the first three months of the year, official data showed Thursday, while figures since the outbreak of the war have pointed to falling consumer and investor confidence and weakening business activity
