Bank of England holds rates as Iran war clouds inflation outlook

The Bank of England kept interest rates unchanged at 3.75% on Thursday but warned it is prepared to raise borrowing costs if the war involving Iran drives a sustained surge in energy prices and inflation.

The decision marked the fifth meeting in a row in which the Bank held rates steady. Six members of its nine-member Monetary Policy Committee voted to leave rates unchanged, while three backed an increase to 4% — one more than at the previous meeting. Catherine Mann joined Huw Pill and Megan Greene in voting for a rise, The Guardian reported.

Governor Andrew Bailey said the conflict in the Middle East had created major uncertainty for the UK economy because of sharp swings in oil and gas prices. “If the conflict in the Middle East persists for an extended period… it’s likely that we will have to tighten policy to counter inflationary pressures in the UK economy,” Bailey told reporters.

But he also pushed back against the idea that the Bank was preparing markets for an imminent increase. “Please do not leave this room thinking that the Bank of England is edging towards a hike, because frankly, there’s nothing in what I said, and I think any of us have said along those lines,” he said.

The Bank said any future move in borrowing costs would depend on how long the energy shock lasts and how severe it becomes. It expects inflation to rise again this year as volatile energy prices feed through, though the peak is now forecast to be slightly lower than previously expected.

UK inflation eased to 2.6% in the year to June, helped by falling diesel and petrol prices during a brief lull in hostilities between the US and Iran. Inflation had previously been expected to peak at 3.5% this year. Under a scenario in which oil prices reach $100 a barrel, the Bank now projects inflation could reach 3.2% in 2026. If oil prices are around $76 before falling back to $71, inflation could reach 3%. Both outcomes remain above the Bank’s 2% target.

“Inflation has fallen faster than expected but the conflict in the Middle East continues to mean high and volatile energy prices,” Bailey said. “That will cause inflation to rise again this year. However, as the conflict unfolds, our job is to make sure any increase in inflation is temporary and that it comes back to our 2% target.”

Oil and gas prices have moved sharply in recent days. The BBC reported that crude fell on Monday after US President Donald Trump said there were “very friendly negotiations” between Washington and Tehran, then rose above $91 a barrel on Wednesday after Trump said of Iran: “We’ll be hitting them hard. They’re going to get a beating.” The Guardian reported that Iran shut the Strait of Hormuz in response to a bombing campaign by the US and Israel, disrupting millions of barrels a day of oil production.

Despite the risk of higher inflation, the Bank now expects the UK economy to grow by 1.1% this year, stronger than it forecast in April.

Markets appeared to take Bailey’s comments as a sign that a September rate rise had become less likely. The Guardian reported that the implied probability of no change at the next meeting rose from 53.6% just before Thursday’s decision to 73% by mid-afternoon.

For households, the hold offers limited immediate relief. Priya Kapadia, a homeowner nearing the end of a fixed mortgage deal with a rate above 5.5%, told the BBC she needs rates to fall to help cover other bills. “We are already paying twice what we were paying as rent for our mortgage,” she said, adding that higher costs had “eroded about 50%” of the money available for other spending. If rates stay where they are and lenders do not cut significantly, she said, “then I’m going to probably save about £10 or £20 a month.”