The Bank of England has warned that 'higher inflation is unavoidable' as it left interest rates on hold, delivering a stark message to UK households to brace for the impact of Trumpflation. The conflict in the Middle East, described by Chancellor Rachel Reeves as a 'folly', has driven up oil and gas prices, with the Bank forecasting average mortgage repayments to rise by £80 a month, food price inflation hitting 4.6% by autumn, and utility bills jumping in July.
Overall inflation is now expected to peak above 3.5% by the end of the year, more than a percentage point higher than pre-war forecasts. In a worst-case scenario where oil prices hit $130 a barrel, inflation could peak above 6%, potentially forcing interest rates up by more than 1.5 percentage points to at least 5.25%.
Despite the inflation shock, the Monetary Policy Committee voted 8-1 to hold rates, with chief economist Huw Pill the sole dissenter. The decision reflects concerns over the UK's weak economy, with GDP growth now expected at just 0.8% this year and unemployment set to peak at 5.5% next year. Governor Andrew Bailey noted that 'the softer real economy makes it appropriate to maintain Bank rate'.
Financial markets have already tightened borrowing costs by more than half a percentage point since the conflict began, providing some headroom. Bailey stressed this might allow the MPC to hold off from rate rises, but other members warned that this market effect could reverse if not validated by action. Even dovish member Swati Dhingra expressed readiness to consider raising rates, though she cautioned on the limit of acceptable output loss.
The Bank faces a bleak trade-off between higher inflation and weaker growth, both of which will squeeze British households further. Policymakers must now navigate the twin forces unleashed by the Middle East conflict, with no easy path ahead.
