The Bank of England is expected to tread carefully with its messaging this week as it prepares to announce an interest rate decision, widely expected to keep borrowing costs unchanged amid rising inflation risks linked to conflict in the Middle East.
Still facing criticism that it — along with other central banks — reacted too slowly when Russian invasion of Ukraine pushed UK inflation above 11% in 2022, policymakers are keen to avoid repeating past missteps.
Governor Andrew Bailey and fellow policymakers will closely monitor how long the U.S.-Israeli conflict with Iran continues and whether the resulting surge in oil and gas prices proves persistent.
As a result, expectations of an imminent rate cut have faded. Economists surveyed by Reuters now largely predict a 7–2 vote by the central bank’s Monetary Policy Committee to keep the Bank Rate at 3.75%. Before the conflict began on February 28, markets had widely expected a cut to 3.5%.
Even before the crisis in the Gulf, the UK economy faced the dual challenge of sluggish growth and persistent inflation pressures. The latest geopolitical tensions have highlighted Britain’s reliance on imported natural gas, raising concerns about renewed energy-driven price increases.
Analysts say higher energy costs could push UK inflation to between 3% and 4% by the end of 2026 if oil and gas prices remain at current levels — significantly above the Bank of England’s 2% target and higher than earlier forecasts of around 2%.
More concerning for policymakers is the possibility that higher energy prices could further lift public inflation expectations, which are already elevated. If that happens, it may become harder for the central bank to argue that any rise in inflation is only temporary.
