Middle East Conflict Keeps UK Interest Rates High

The UK's central bankers believe that only the ongoing Middle East crisis is preventing a drop in interest rates. The Bank of England's monetary policy committee held its decision to keep interest rates at 3.75% on Thursday, citing almost entirely absent underlying pressures on inflation in the domestic economy.

Prices are stable and would be rising steadily at the central bank's 2% target if not for the war. Supermarkets have kept food inflation low, and services firms have managed to restrict increases this year, despite rising energy and transport costs. The Bank's quarterly review notes that 'there are few signs of second-round effects' from these costs.

Annual wage increases are currently at 2.8% in the private sector, expected to rise to 3% in the third quarter. However, this increase is still within comfortable levels for Bank officials. Some members who voted to increase interest rates acknowledge that neither workers nor firms have reacted to inflation yet, but expect them to do so once prices begin to rise again.

The majority of the MPC focused on the labour market and a rise in unemployment over the last three years. They also see that financial markets have reacted by raising mortgage and commercial lending rates, tightening the screw on homebuyers and firms without the Bank making a move itself.