BOE holds rate, warns of hike if Iran war persists

The Bank of England kept its key interest rate at 3.75 percent on Thursday, but warned a rate hike could become necessary as the ongoing war in the Middle East drives up energy prices. This decision came after the Federal Reserve increased US interest rates for the first time since 2023, aiming to tackle rising inflation. Bank of England Governor Andrew Bailey stated that while higher energy costs have had a minor impact on UK price and wage setting so far, persistent volatility will likely lead to further price increases and potentially require rate hikes.

Energy price spikes triggered by the war have prompted central banks globally to adopt a more restrictive monetary stance. The Bank of Japan is expected to raise borrowing costs on Friday to combat inflation, while the European Central Bank recently lifted rates for the second time this year. Three members of the Bank of England's Monetary Policy Committee voted to raise the UK rate by 0.25 percentage points, bringing the benchmark to 4 percent, while Bailey, along with four other members, opted to keep rates unchanged for a sixth consecutive meeting.

UK inflation rose to 3.1 percent in August, well above the Bank's 2 percent target, and the BoE anticipates inflation will surge to 4 percent by early 2027. The BoE also warned that if the Middle East conflict continues and secondary effects emerge, policymakers may need to tighten monetary policy further. Prime Minister Andy Burnham indicated he is prepared to make "difficult decisions" on the economy as the government's budget update on October 28 approaches, with Finance Minister John Healey facing pressure to ease the cost of living crisis while adhering to strict fiscal constraints.