Interest rates are likely to rise this year as the Bank of England attempts to curb inflation following a “significant energy price shock” from the Iran war.
The majority of the Bank’s rate-setters voted to keep borrowing costs at 3.75% in April, but signalled they would act “forcefully” should oil prices reach and remain at $130 a barrel for a number of months.
The price of Brent crude hit $126 on Thursday following reports the US may resume attacks on Iran.
The governor of the Bank of England, Andrew Bailey, said: “The war in the Middle East is causing inflation to rise again this year.”
“We’ll continue to monitor the situation and its impact on the UK economy very closely,” Bailey added.
“Whatever happens, our job is to make sure that inflation gets back to the 2% target after the initial impact of the war on energy prices has passed.”
Because of “uncertainty around the severity and duration” of the war, the Bank considered a range of scenarios to determine how it will react in the coming months.
In the most likely scenario, inflation would average 3.3% for this year. But if oil remains elevated and gas prices soar, it could reach as much as 4.5% for 2026 – more than twice the Bank’s target.
UK economic growth is expected to be lacklustre this year – expanding by 0.8% in the best case or by 0.7% if conditions worsen.
However, the UK is forecast to avoid a technical recession, which is defined as two consecutive three-month periods of contraction.
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