The Bank of England has signalled that interest rates could rise later this year if escalating tensions in the Middle East trigger a sustained surge in energy prices and reignite inflation pressures across the UK economy.
Policymakers held interest rates at 3.75 per cent on Thursday, but warned that the outlook remains highly uncertain, with global energy markets now seen as a key driver of future policy decisions.
The Monetary Policy Committee (MPC) said it was closely monitoring the situation and had not ruled out further tightening if higher oil and gas prices begin to feed into wages and broader price-setting behaviour — so-called “second-round effects” that could entrench inflation.
Andrew Bailey, the Bank’s Governor, said it would be a mistake to delay action until those effects became fully visible.
“It would be a mistake to wait to see the second-round effects before acting, because it would be too late,” he said, underscoring the Committee’s concern that inflationary pressures could become embedded in the economy.
Members of the nine-person MPC said future decisions would depend heavily on how persistent the current energy shock proves to be, with policymakers examining a range of scenarios.
In a more severe projection, Brent crude oil could rise to around $130 a barrel and remain elevated for an extended period, pushing inflation as high as 6.2 per cent and preventing it from returning to the Bank’s 2 per cent target for several years.
Mr Bailey said he had placed “some weight” on the more extreme scenarios considered by the Committee, adding that such an outcome would require “a stronger monetary policy response”.
One member of the Committee, Huw Pill, voted for an immediate rise in interest rates to 4 per cent, arguing that “higher energy prices represent an inflationary shock to the UK economy”.
The warning comes as Brent crude briefly touched $126 a barrel on Thursday — its highest level in four years — amid reports of potential further US military escalation in the Iran conflict. The spike has intensified concerns that energy costs could remain elevated for longer than previously expected.
Economists said the Bank’s tone had shifted noticeably towards a more hawkish stance. Analysts at Pantheon Macroeconomics said they now expect rate increases in June and September, while ING suggested the Bank was “inching closer” to a hike as inflation risks build.
Inflation is already running ahead of target. The latest figures show the Consumer Prices Index rising to 3.3 per cent in March, driven in part by higher fuel costs, with policymakers warning of further volatility ahead.
The Bank’s latest assessment suggests inflation could ease slightly to around 3.1 per cent in the second quarter of this year, helped by a lower energy price cap for households, but then pick up again depending on the trajectory of global oil and gas markets.
Even in a more benign scenario — assuming tensions ease and energy prices stabilise — inflation is still projected to peak at 3.6 per cent later this year, well above target.
At the same time, growth expectations have been revised down across all scenarios. In the central projection, the economy is forecast to expand by just 0.8 per cent in 2026 and 1 per cent in 2027, while a more adverse outcome would see growth slow to 0.7 per cent this year and 0.8 per cent next year.
That compares with earlier forecasts in February, when the Bank had expected growth of 0.9 per cent this year and 1.5 per cent in 2026, highlighting how quickly the outlook has deteriorated.
The European Central Bank also kept rates on hold this week but acknowledged it had considered a hike, reflecting similar concerns about energy-driven inflation across advanced economies.
With geopolitical tensions continuing to drive volatility in global markets, the Bank of England now finds itself balancing fragile growth against the risk of a renewed inflation surge — and the possibility that interest rates may yet have to rise again before the year is out.
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