The Bank of England has kept its main interest rate on hold at 3.75 per cent, despite UK inflation rising to a five-month high and growing pressure from higher fuel prices linked to the war in Iran.
The decision comes as central banks assess whether renewed energy costs will feed into broader inflation. The US Federal Reserve raised borrowing costs on Wednesday, while financial markets expect the Bank of England to increase rates at one of its next two meetings, in November or December.
UK inflation is currently running at an annual rate of 3.1 per cent, above the Bank’s target of 2 per cent. Economists expect it to rise further in the coming months, after households face another increase in domestic energy bills from October.
David Rees, head of global economics at Schroders, said the Bank was likely to leave rates unchanged because wages and the labour market remained relatively weak.
“That should limit the extent to which imported price pressures become embedded in domestic wages and prices,” he said.
Interest rates had been falling from a 15-year high of 5.25 per cent before the United States and Israel attacked Iran in late February. The conflict has driven oil and gas prices sharply higher, partly because the strategically important Strait of Hormuz has been largely closed to traffic.
Higher interest rate expectations are also increasing pressure on the British Government, as the cost of servicing its debt accounts for a larger share of public spending. The Bank’s decision will affect the cost of mortgages, personal loans and other borrowing.
