Bank of England holds interest rates at 3.75% and hikes inflation forecast amid Iran war fears
The Bank of England has held interest rates at 3.75% amid fears the US-Israel war on Iran could see inflation rise.
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The Bank’s nine-strong Monetary Policy Committee unanimously voted to keep rates on hold.
In the minutes of the meeting, the Bank said: “The committee would have more information and analysis ahead of its next meeting on the evolution and impact of the conflict.
“The committee would continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices, and the UK inflation outlook.
“All members stood ready to act as necessary to ensure that CPI inflation remained on track to meet the 2% target in the medium term.”
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The pivot reflects the changing outlook for energy costs on the back of soaring oil and gas prices in recent weeks, and the potential for this to weigh on UK inflation.
Governor Andrew Bailey said: “War in the Middle East has pushed up global energy prices.“You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year.
“The best way to tackle this is at the source by reopening energy supply lines.”
He said he would be monitoring developments “extremely closely” and that the Bank “stands ready to act” to make sure inflation returns to the 2% target level.
Consumer Prices Index (CPI) inflation fell to 3% in January, and MPC forecasts in February showed the rate falling toward 2% from April, largely due to Government efforts to cut household energy bills.
But, on Thursday, the MPC said recent increases in wholesale energy costs would delay the return of CPI inflation to target, as it was already leading to higher fuel prices.
It was now expecting inflation to be around 3% in the second quarter of 2026, up from the 2.1% that had been forecast in February.
Higher wholesale gas prices could then feed through into a higher Ofgem energy price cap from July, which could add around 0.75 percentage points to inflation over the third quarter.
This, combined with firms potentially passing on higher energy costs to consumers, could mean CPI inflation increases to up to 3.5% in the third quarter, up from the previous 2% forecast, the MPC said.