The Bank of England held its main interest rate at 3.75% on Thursday, while indicating in its deliberations that interest rates could rise later as policymakers gauge how the Iran war is affecting inflation and growth. In remarks, Bank Gov. Andrew Bailey said the bank judged the decision “a reasonable place given the situation of the economy and the unpredictability of events in the Middle East,” adding that the Bank of England aims to ensure inflation returns to its 2% target after the first effect of the war on energy prices passes.
The minutes from the rate-setting meeting showed that eight of the nine members voted for no change, while one member supported a quarter-point increase. Bailey framed the decision as a balance between current economic conditions and heightened uncertainty linked to developments in the Middle East, with policymakers focused on whether an energy-driven inflation spike would broaden into wages and other components of price growth.
The bank also took the unusual step of publishing a range of forecasts that reflected different possible paths for energy prices, given the geopolitical uncertainty around the Iran war and Tehran’s effective closure of the Strait of Hormuz. The bank’s outlook incorporated the idea that oil and gas costs could remain elevated for longer than markets previously expected, and it outlined multiple ways the conflict could unfold, including scenarios that could involve multiple rate rises and an increased risk of recession.
Before the start of the Iran war on Feb. 28, markets had expected the Bank of England to cut rates as inflation was projected to drift back toward the 2% target during the spring. But the war has disrupted those projections, with the source quoting that prices for oil and other costs have risen sharply, and energy prices moving higher again in recent days as traders priced in expectations that the Strait of Hormuz would remain closed for a long time.
Brent crude, the international benchmark, briefly jumped to over $126 a barrel on Thursday, the highest level since the period following Russia’s full-blown invasion of Ukraine four years earlier, the article said. Bank officials said they would watch whether the energy-price shock spreads through the economy, including through higher wages, and whether the oil shock pushes the economy toward recession, which could, in turn, dampen follow-on price pressures.
Other central banks also held rates unchanged this week, including the U.S. Federal Reserve, the Bank of Japan and the European Central Bank, while they assessed the length of the volatility tied to the Middle East conflict and what it could mean for inflation. The grouping underscored how the war has altered the global timeline for interest-rate decisions, forcing central banks to weigh competing risks from persistently higher energy prices versus the possibility of slower demand.
Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, told the article that recessionary risks would limit second-round inflation effects. He added that if oil prices keep rising, it would be difficult for the Bank of England to avoid hiking later this year.
Britain’s domestic policy response also loomed in the bank’s outlook, with the article saying policymakers would monitor any steps from Britain’s Labour government to limit the inflation impact on households and businesses. Treasury chief Rachel Reeves said the war in the Middle East is not Britain’s war, but that it is something the government has to respond to, and she said she is ready to provide support when and if needed.