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%, while warning that a potential hike could be necessary due to rising energy costs stemming from the ongoing war in the Middle East. This decision followed the Federal Reserve's decision to raise US interest rates for the first time since 2023, aimed at combating surging inflation.

Bank of England governor Andrew Bailey stated that while higher energy costs have had a limited impact on price and wage settings in the UK so far, the prolonged volatility is likely to increase inflation in the future. If this trend continues, Bailey emphasized, the central bank may be compelled to raise the benchmark rate.

The Bank of Japan is expected to raise borrowing costs on Friday amid its battle against inflation, and the European Central Bank recently increased interest rates for the second time this year. Out of the nine members of the BoE's monetary policy committee, three voted to increase the UK rate by 0.25 percentage points to 4%, while Bailey joined the other five in calling for no change for the sixth consecutive time.

Inflation in the UK reached 3.1% in August, significantly above the central bank's 2% target. The BoE anticipates that price pressures will intensify, projecting inflation to rise to 4% by the first quarter of 2027. The central bank warned that if the Middle East conflict persists and the risk of secondary effects increases, policy tightening may become necessary.

These concerns have driven global government bond yields to record highs. Prime Minister Andy Burnham acknowledged the need to make difficult decisions regarding the economy as the government's budget update approaches on October 28. Burnham and Finance Minister John Healey face pressure to address the cost of living crisis while adhering to fiscal responsibility.