The Bank of England has left interest rates unchanged at 3.75% but warned that 'higher inflation is unavoidable' due to the conflict in the Middle East, potentially necessitating rate increases later this year. The Monetary Policy Committee voted 8-1 to hold borrowing costs, with chief economist Huw Pill dissenting in favour of a rise to 4%.
Governor Andrew Bailey stated that the decision was reasonable given the unpredictability of events, but emphasised that future moves depend on the 'size and duration of the shock to energy prices'. The Bank outlined a worst-case scenario where oil exceeds $130 a barrel, pushing inflation to 6% by early 2027 and requiring rates to rise to 5.25%.
UK inflation rose to 3.3% in March, up from 3% in February, driven by higher energy costs. The Bank expects typical energy bills to increase 16% to £1,900 by summer, with food inflation also rising 7% by year-end due to higher fertiliser, energy, and transport costs.
Despite the inflationary pressures, the Bank noted subdued labour demand and rising unemployment since 2024, which may constrain wage growth and companies' ability to pass on costs. In all three scenarios considered, inflation is projected to rise and unemployment to climb to at least 5.5%.
Bailey indicated that rates could remain unchanged if the Iran war is resolved quickly, but warned that prolonged energy disruptions would worsen the economic outlook. Brent crude hit a four-year high of $126 a barrel before retreating to $115.50.
