The Bank of England has decided to keep the UK's base interest rate unchanged at 3.75%, despite increasing global economic pressures stemming from the conflict in Iran. This decision comes as central banks worldwide, including those in the eurozone and the United States, have raised their interest rates in response to surging oil prices and borrowing costs. Christine Lagarde, President of the European Central Bank, has implemented two interest rate hikes this year, while Kevin Warsh, recently appointed chairman of the Federal Reserve, increased US borrowing costs earlier this week.

The Bank of England’s approach stands out as it maintains its rate amidst soaring inflation rates in many Western economies. UK's inflation currently sits at 3.1%, above the official target of 2%, though it is rising at a slower pace than earlier this year. John Bailey, the Governor of the Bank of England, asserts that the current level effectively addresses the economic fallout from the conflict, which began in February. He noted that the Monetary Policy Committee's (MPC) immediate concern is not whether to stem inflation, but to prevent cost increases from permeating through the economy, including wage demands and corporate price hikes.

Despite the higher global oil prices, which have shot up to $108 per barrel due to increased tensions in the region including threats from the Houthi rebels, so far there has been limited evidence of second-round inflation effects within the UK economy. Consequently, six out of nine MPC members voted to keep rates steady, with some officials cautioning that the looming conflict risks could prompt a change in policy soon. Bailey reflected concerns about a declining urgency to negotiate peace in the region, which could extend inflationary pressures.

Looking ahead, the Bank’s previous economic forecasts suggested that if the conflict continues, inflation may peak at around 4.5% next year, significantly surpassing the Bank’s target. This scenario foresees a potential basis for the MPC to raise interest rates to 4.25%, with a possibility that these rates could remain elevated for years. Policymakers recognise that higher petrol prices and household energy bills could lead to a persistent rise in costs across various sectors, amplifying the risk of a wage-price spiral.

Additional complications arise from the UK's job market, which has seen unemployment rise to 4.9%, a notable increase from the near-record low of 3.6% in 2022. Although Britain's job growth outlook appeared subdued, recent signs suggest stabilization, potentially empowering workers to demand higher wages amid the crisis.

Food price inflation has so far been unexpectedly low, but experts warn this may change due to adverse weather patterns and increased fertiliser costs linked to the ongoing conflict. Catherine Mann, one of the MPC members advocating for a rate increase, flagged the combined risk of rising energy and food prices as a significant trigger for inflation spikes.

As the Bank continues to assess the evolving situation, the prospect of an interest rate increase in November’s meeting appears plausible if conditions do not improve. Each member of the MPC acknowledges the necessity for adjustments as they strive to keep inflation within target limits. The MPC has indicated that it remains prepared to act as required to ensure economic stability.

‍