Bailey warns on inflation risks as Iran war roils UK economy

Bank of England's Andrew Bailey has cautioned about potential inflationary pressures and higher energy costs in the UK economy due to the ongoing conflict in Iran. Speaking to MPs, the Bank governor highlighted that inflation risks were "to the upside" and energy prices could rise further if the war persists. The conflict has led to a surge in oil prices and volatility, with Brent crude prices nearing $100 a barrel after the Houthi militia attacked Saudi Arabian refineries.

Bailey emphasized that the turbulence in energy markets is affecting financial markets. Interest rate hikes, driven by traders, are consistent with a pessimistic outlook on the UK economy's risks. However, Bailey stressed that there is no secret plan to hike interest rates in the coming months and the Bank's Monetary Policy Committee will rely on data.

Supply chain concerns for oil and gas production in the Middle East persist, as the US, Israel, and Iran have failed to reach a peace deal. The Bank previously warned that inflation could reach over 4% if oil prices remain around $100 per barrel for several months. Inflation in the year to July stood at 2.9%, up from 2.6% the previous month.

The UK's high borrowing costs reflect fears of persistent inflation, with Bailey noting that traders have priced in a premium to cover risks from prolonged trade disruptions in the Strait of Hormuz. High youth unemployment, at around 16%, is a matter of concern for the Bank.