Bank of England keeps rates at 4% as inflation looms

The Bank of England maintained its key interest rate at 4% on Thursday, signaling the possibility of further increases to curb inflation stemming from the Iran conflict. Six members of the Monetary Policy Committee voted to keep rates unchanged, while three advocated for a quarter-point rise to 4%. Despite the decision to hold rates, financial markets predict a likely rate hike at one of the upcoming policy meetings in November or December.

Bank Governor Andrew Bailey stated that while recent global energy cost hikes have had a modest impact on price and wage setting in the UK, prolonged volatility could significantly influence inflation and increase the likelihood of a Bank Rate increase to meet the 2% target. The inflation outlook will be crucial, as some central banks, like the U.S. Federal Reserve on Wednesday, have already begun raising borrowing costs.

The minutes of the Bank of England's decision revealed that inflation is now projected to climb to around 4% in the first quarter of next year from the current 3.1% as households face higher domestic energy bills. Interest rates in the UK had been on a downward trend from a 15-year peak of 5.25% until the U.S. and Israel's attack on Iran in late February.

This conflict led to sharp surges in oil and gas prices, partly due to the Strait of Hormuz being largely blocked from traffic since then. The Bank of England's rate-setters are scheduled to meet on November 5, and many economists believe this will be an opportune time for a rate change as they will have the latest quarterly economic forecasts and Bailey will deliver a press briefing afterwards.