Bank Holds Interest Rates at 3.75% but Warns of Potential Hike if Iran Conflict Persists

The Bank of England held interest rates at 3.75% for the fifth consecutive time but indicated that they may raise them if the conflict in Iran persists. The decision was made by a split vote, with six members voting to keep the rate steady and three calling for an increase to 4%. The majority felt that holding rates at 3.75% would provide sufficient protection against inflation, but acknowledged that additional policy restraint may be necessary if further pressures on inflation materialise.

Bank Governor Andrew Bailey said that if the conflict in Iran persists, interest rates could be raised to counter inflationary pressures. He noted that the world feels as uncertain and volatile today as it did in April, when the MPC last met. The Bank predicted that UK inflation will average around 3% this year before slowing to 2.7% in 2027 and 1.8% in 2028.

The main driver of inflation is expected to be higher oil prices linked to the Middle East conflict, which are expected to push energy prices higher for households and businesses in the coming months. The Bank also warned that a memory chip supply shortage could add to inflation, pushing technology prices higher and adding around 0.1 percentage points to UK consumer price inflation by the end of the year.