The Bank of England has left interest rates unchanged at 3.75%, but warned that higher inflation is unavoidable as a result of the war in the Middle East. The Monetary Policy Committee (MPC) voted 8-1 to keep borrowing costs on hold, with chief economist Huw Pill dissenting in favour of a rise to 4%.
Governor Andrew Bailey said the decision to hold rates was reasonable given the unpredictability of events in the Middle East. However, he cautioned that if energy costs remain persistently high, the Bank might have to take a more forceful response to keep inflation under control. The Bank outlined a worst-case scenario where oil prices rise above $130 a barrel, pushing inflation to 6% by early 2027 and forcing interest rates up to 5.25%.
UK inflation rose to 3.3% in March, up from 3% in February, according to the Office for National Statistics. The Bank warned that typical energy bills could rise by 16% to £1,900 by summer, and food inflation could increase by 7% by year-end due to higher fertiliser, energy, and transport costs.
Despite the upward pressure on prices, the Bank expects second-round effects to be restrained, citing subdued labour demand and rising unemployment since 2024, which limits wage bargaining power. Consumer confidence remains shaky, constraining companies' ability to raise prices.
The Bank laid out three scenarios based on the Iran conflict's impact. In the central scenario, oil peaks at $108 a barrel, with inflation at 3.3% in 2026 before falling to 2% by 2028, and unemployment rising to 5.5%. Governor Bailey emphasised that the Bank is 'actively holding' its position and will act if needed to control inflation.
