The Bank of England has kept interest rates unchanged for the fifth meeting in a row but has indicated it could raise them if the Iran war escalates.
It expects inflation – the rate at which prices rise – to pick up due to volatile oil and gas prices caused by the Middle East conflict, although the peak will be slightly lower than previously thought.
The Bank voted to hold interest rates at 3.75% at its latest meeting.
Bank of England governor Andrew Bailey warned the future of UK interest rates depended on whether the US led war against Iran continues.
While major uncertainties remain because of the war, the Bank predicts the UK economy will grow this year by more than previously forecast.
Bailey told the BBC: “If we get a continuation of this conflict going on and oil prices stay above $100 a barrel… the odds are that interest rates will have to go up higher.”
But he also said if a ceasefire, and memorandum of understanding, is established and sticks that would make a difference.
“So it depends on how the events in the Middle East, frankly, unfold. And sadly, we all know this is highly unpredictable,” Bailey said.
“What goes on in the Gulf is not, I’m afraid, under our control.”
Three members of the Bank’s nine-member rate-setting committee voted for a hike, one more than the previous meeting – with that member explicitly citing the collapse of the US-Iran memorandum of understanding for their vote to raise rates.
However, speaking at an earlier news conference, Bailey said the Bank was not currently moving towards raising interest rates.
“Please do not leave this room thinking that the Bank of England is edging towards a hike, because frankly, there’s nothing in what I said, and I think any of us have said along those lines,” he told reporters.
If the Iran war continues and oil prices hover around $100 a barrel, then a rate rise seems likely. But many in the markets expect tensions to subside in the coming weeks, ahead of crucial elections across the US in the autumn.
