The Bank of England’s monetary policy committee held interest rates steady at 3.75% on Thursday, citing the Middle East conflict as the principal factor that could keep inflation elevated in the coming months. Officials indicated that underlying domestic inflationary pressures are nearly absent from the UK economy, with prices tracking toward the central bank’s 2% target in the absence of external shocks.
The central bank remains concerned about potential second-round effects from rising energy and transport costs, including the possibility that retailers might raise prices based on consumer expectations about war-related production increases, or that workers might demand higher wages in anticipation of broader inflation. However, officials noted these trends have not yet materialized. Supermarkets have maintained relatively low food inflation, and services companies have successfully restrained price increases this year. Annual wage growth in the private sector remained at 2.8% in the second quarter, with expectations for a modest rise to 3% in the third quarter—a level the Bank considers manageable.
Three members of the monetary policy committee voted for a rate increase, arguing that workers and companies will eventually respond to price pressures once inflation begins rising in earnest. However, the committee majority focused instead on labor market conditions, noting a rise in unemployment and sharp decline in vacancies over the past three years. The majority also observed that financial markets have independently tightened lending conditions without Bank intervention, raising mortgage and commercial borrowing rates.
The Bank’s forecasters project inflation will peak at 3.2% next spring under baseline scenarios, but could reach 4.1% if crude oil prices remain elevated above $100 per barrel and the Middle East conflict persists. The National Institute of Economic and Social Research estimated the UK has already lost approximately £28 billion in growth this year due to the conflict. Officials warned that further rate increases may prove necessary if the geopolitical situation does not resolve, potentially amplifying the economic impact on businesses, consumers, and mortgage borrowers.
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