LONDON – The Bank of England held its benchmark interest rate at 3.75 per cent on July 30 but warned of higher inflation to come owing to the US-Iran war pushing up energy prices.
“Inflation has fallen faster than we’d expected, but the conflict in the Middle East continues to mean high and volatile energy prices,” said Bank of England governor Andrew Bailey.
“That will cause inflation to rise again later this year.”
The widely expected decision comes after the Federal Reserve held US interest rates steady on July 29, though some policymakers called for a hike to combat surging inflation.
Three members of the Bank of England’s monetary policy committee voted to increase the British rate by 0.25 percentage points to 4 per cent.
Bailey joined the five remaining members in calling for no change for a fifth time in a row, minutes of the meeting showed.
The committee said it stood “ready to act” to ensure inflation meets the central bank’s 2 per cent target.
Britain’s annual inflation rate dropped to 2.6 per cent in June as fuel prices eased in the wake of a short-lived ceasefire between the United States and Iran.
However, the dip is expected to be temporary as fresh fighting in the Middle East this month pushed oil prices higher.
New British Prime Minister Andy Burnham has vowed to ease cost-of-living pressure, unveiling measures including a tax cut on domestic electricity bills.
The Bank of England set out three scenarios for the British economy, depending on how the conflict evolves.
Its central forecast projected inflation to peak at 3.2 per cent towards the end of 2026 before easing slightly.
“There remains scope for the outlook to change materially as events in the Middle East unfold,” the bank said in its monetary policy summary.
It expects economic growth to remain “subdued” in 2026 and in early 2027.
The central bank forecast economic output (GDP) to reach 1.1 per cent in 2026 and 2027 – an improvement on its April estimates.
In its most pessimistic scenario, where tensions in the Middle East escalate, the Bank of England forecast that Britain’s inflation could jump as high as 4.5 per cent in 2027. AFP
