Bank of England joins other central banks in freezing rate cuts as Iran war upends global economy

LONDON (AP) — The Bank of England kept its main interest rate on hold at 3.75% Thursday and hinted of hikes to come as policymakers assess the economic impact of the Iran war and Tehran’s effective closure of the Strait of Hormuz, through which a fifth of the world’s crude passes. Other central banks have also held rates this week, including the U.S. Federal Reserve, the Bank of Japan and the European Central Bank, with all opting for no change as they gauge how long the volatility related to the conflict in the Middle East will persist and what the ensuing impact on inflation will be.

Minutes from the Bank of England meeting showed that eight of the nine rate-setters voted to keep rates on hold while one member opted for a quarter-point hike. But there was a clear signal that interest rates could rise in coming months.

“We think this is a reasonable place given the situation of the economy and the unpredictability of events in the Middle East,” said Bank Gov. Andrew Bailey. "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.”

In an unusual development, the bank published a range of forecasts given the geopolitical uncertainties. It said that in a worst-case scenario where oil and gas prices stay higher for longer, U.K. inflation could rise to as much as 6.2% by early 2027 from 3.3% currently. It also considered several ways that events could unfold with a worst-case scenario leading to multiple rate rises and an increased risk of recession. Before the start of the Iran war on Feb. 28, there had been an expectation in financial markets that the Bank of England would cut rates given that inflation was predicted to fall back toward its 2% target during the spring. The war has since upended the bank’s predictions and wider global economic forecasts as the price of oil and other costs have spiked sharply higher. Energy prices have raced up again over the past few days as traders price in a growing expectation that the Strait of Hormuz will remain closed for a long time to come. Brent crude, the international standard, briefly jumped to over $126 a barrel at one point Thursday, its highest level since the aftermath of Russia’s full-blown invasion of Ukraine four years ago.

Bank of England policymakers will be keeping an eye on whether the inflation spike starts to spread through the economy, by way of higher wages, for example. They will also monitor how the oil price shock hits the economy and whether it leads to a recession, which would keep a lid on price rises.

Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, said he thinks the recessionary risks will limit any second-round inflation effects.

“But if oil prices continue to move higher, it is hard to see how the Bank avoids having to hike later this year,” he said.

Policymakers will also be alert to any upcoming action from Britain's Labour government to limit the inflation impact on households and businesses. Treasury chief Rachel Reeves, whose hopes over the cost-of-living have been blown off course by the crisis in the Middle East, has said she is ready to provide support when and if needed.

“The war in the Middle East is not our war, but it is one we have to respond to,” said Reeves.