Bank of England keeps interest rates at 3.75% as uncertainty over Iran war continues

Want LBC stories before everyone else? Set us as your Preferred Source on Google

Eight of the nine members of the Monetary Policy Committee (MPC) voted to hold interest rates, with just one wanting to hike them up to 4% .

Most economists expected this outcome, but experts have warned that an interest rate increase could remain on the horizon if the Iran conflict continues to put pressure on UK inflation.

The Bank of England said that in a worst-case scenario where oil and gas prices stay higher for a longer amount of time, UK inflation could rise to as much as 6.2%.

The Bank considered several ways that events could unfold but a worst-case scenario could lead to multiple rate rises and an increased risk of recession.

Read more: Bank of England set to hold interest rates despite Iran war pushing up inflation

Read more: 'Cheaper to rent in Britain than to buy a house’ due to rise in mortgage rates sparked by Iran war

Andrew Bailey, the Bank’s governor, said he felt borrowing costs were at a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East”.

But he said the Bank was monitoring the war’s “impact on the UK economy very closely”.

The US-Israel war with Iran and the closure of the Strait of Hormuz has sent oil prices soaring, to highs of about 126 dollars a barrel on Thursday, which has already driven up UK inflation.

Last week, a raft of economic data showed the conflict has helped drive inflation higher.

The rate of Consumer Prices Index (CPI) inflation rose to a three-month high of 3.3% in March, the latest official data showed, on the back of accelerating fuel prices.

The price of motor fuels jumped by 8.7% month-on-month – the largest increase since June 2022 – as disruption to oil production and transportation drove diesel and petrol prices higher.

Meanwhile, Bank of England research saw UK firms warn they think food inflation could jump as high as 7% as they increased their inflation outlook for next year.

Maike Currie, vice president of personal finance at PensionBee, said: “A hold was always the most likely outcome, reinforcing that the Bank of England won’t jerk the wheel every time inflation spikes – even with energy prices sky-rocketing.

“A resilient labour market continues to give policymakers some breathing room. With unemployment unexpectedly falling, wage pressures remain elevated, reducing the urgency for immediate rate cuts. However, the broader consumer picture is less robust than headline figures suggest.

“Recent figures show UK retail sales have been propped up by fuel stockpiling and the ‘lipstick effect’, where households cut back on big-ticket purchases but continue spending on small, affordable treats – like coffee, beauty products or low-cost fashion – to lift their mood. It’s resilience, but a fragile kind.”

Suren Thiru, Chief Economist at the Institute for Chatered Accountants, said: “Keeping interest rates unchanged will feel like a demoralising setback for households struggling with this renewed energy shock and those businesses trying to access enough finance to help mitigate the damaging headwinds from the Iran war.

“The near unanimous backing for this decision suggests that interest rates are currently in a holding pattern as most policymakers wait for the fog to clear on the economic fallout from the Iran conflict before deciding whether to raise rates.

“With the Bank’s new forecast scenarios indicating that stagflation is now a critical risk, future policy decisions will become more fraught as rate-setters try to strike the balance between dealing with rising inflation without further damaging wider economic activity.

“Though interest rates could well remain at 3.75% for the rest of the year, it will become an increasingly close call with the vote split among committee members likely to turn more hawkish if inflation surges as the Bank is forecasting.”