The Bank of England has signalled that a weakening labour market could yet trump rising global challenges to allow for more interest rate cuts in the near term.
Policymakers on the nine-member monetary policy committee (MPC) voted 7-3 to maintain Bank rate at 4.25%.
There was greater support than was expected for a cut.
The Bank had previously signalled that a majority on the committee were cautious about the effects of global instability – especially the on-off US trade war.
Money latest: What interest rate decision means for your money
But the minutes of the Bank’s meeting showed there was a greater focus on a rising jobless rate and evidence that employers are shedding jobs – indicating it had dominated the meeting.
It acknowledged, however, that there were potential challenges from the on-off US trade war and as a result of the Israel-Iran conflict.
Treasury to kick off search for new boss of banking watchdog
Interest rate cut to 4.25% by Bank of England
Savings Guide: The current best rates to make the most of your cash
The barrage of warheads has already resulted in double-digit percentage spikes to oil and natural gas prices in the space of a week.
“Interest rates remain on a gradual downward path,” governor Andrew Bailey said while adding that there was no pre-set path.
“The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation,” he added.
The Bank maintained its core message that it would take a “gradual” and “careful” approach.
“Energy prices had risen owing to an escalation of the conflict in the Middle East. The committee would remain vigilant about these developments and their potential impact on the UK economy,” the Bank said.
The rise in the UK’s jobless rate, along with recent data on payrolled employment, has been linked to a business backlash against budget measures, which kicked in in April, that saw employer national insurance contributions and minimum pay demands rise.
While a weaker labour market, including a fall in vacancies, could allow room for the Bank to react through further interest rate cuts, the spectre of war in the Middle East is now clouding its rate judgements.
The last thing borrowers need is an inflation spike.
The UK’s core measure of inflation peaked above 11% in the wake of Russa’s invasion of Ukraine – giving birth to what became known as the cost of living crisis.
Please use Chrome browser for a more accessible video player
Inflation across the economy was driven by unprecedented spikes in natural gas costs, which pushed up not only household energy bills to record levels but those for businesses too – with the cost of goods and services reflecting those extra costs.
Borrowing costs have eased, through interest rate cuts, as the pace of price growth has come down.
The rate of inflation currently stands at 3.4% but was already forecast to rise in the second half of the year before the aerial bombardments between Israel and Iran had begun.
LSEG data shortly after the Bank of England minutes were published showed that financial markets were expecting a quarter point cut at the Bank’s next meeting in August and at least one more by the year’s end.
Read more:
Why Middle East conflict poses new cost of living threat
Be the first to get Breaking News
Install the Sky News app for free
Commenting on the Bank’s remarks Nicholas Hyett, investment manager at Wealth Club, said: “Conflict in the Middle East risks higher energy prices potentially pushing inflation higher – though calling the course of events there is almost certainly a mugs game, and the Bank has said that under current conditions it expects inflation to remain broadly at current levels for the rest of the year.
“The risk is that all the uncertainty leaves the Bank paralysed, with rates stuck at their current level,” he concluded.
