Bank of England holds rate, warns of hike if Iran war persists

On Thursday, the Bank of England maintained its benchmark interest rate at 3.75%, but cautioned that a potential rate hike may be required due to rising energy costs from the ongoing war in the Middle East. This decision followed the Federal Reserve's recent decision to raise US interest rates for the first time since 2023 to combat surging inflation.

Bank of England Governor Andrew Bailey noted that while higher energy costs have had a limited impact on price and wage setting in the UK so far, the longer the volatility persists, the more significant the impact on inflation could become, potentially necessitating a rate increase. The surge in energy prices due to the conflict has prompted central banks worldwide to adopt a more hawkish stance on monetary policy.

The Bank of Japan is expected to raise borrowing costs on Friday, while the European Central Bank recently increased rates for the second time this year. At the Bank of England's recent meeting, three members voted to increase the UK rate by 0.25 percentage points to 4%, while Bailey, joined by the remaining five members, called for no change, marking the sixth consecutive time he had voted against a rate hike.

UK inflation reached 3.1% in August, well above the central bank's 2% target. The Bank of England anticipates price pressures to intensify, projecting inflation could reach 4% by the first quarter of 2027. If the Middle East conflict continues for an extended period and the risk of second-round effects increases, the BoE expects policy to tighten in response.

Concerns about inflation have driven global government bond yields to multi-decade highs in recent weeks. UK Prime Minister Andy Burnham stated Wednesday that he is prepared to make difficult economic decisions as the government's budget update on October 28 approaches, facing pressure to address the cost of living crisis while maintaining fiscal prudence.