Inflationary pressures are once again looming over the Bank of England as energy prices rise due to conflict in the Middle East. Market expectations for interest rate cuts this year have completely reversed, with some even betting on a rate hike before year-end. Against a backdrop of inflation still above target—and at risk of rebounding due to energy shocks—coupled with sluggish economic growth, the central bank faces a difficult choice: continue easing to support growth or tighten policy to curb inflation.
The Bank of England is expected to leave interest rates unchanged at its upcoming policy meeting. Future policy decisions will likely depend on how long the energy shock lasts and whether inflation expectations begin to rise again. When the UK faced a major energy shock in 2022 following Russia’s invasion of Ukraine, the central bank aggressively raised rates to rein in soaring inflation. This time, however, the situation is different.
Four years ago, surging inflation hit an overheating economy. Unemployment was at a 48-year low, job vacancies hit a record high, wage growth was the fastest this century, households had pandemic-era savings to spend, the government was stimulating demand, and interest rates had just started rising from a historic low of 0.1%. Today, the picture is starkly different. While Middle East tensions have triggered energy market volatility and revived inflation fears, the UK is also seeing rising unemployment, fewer job openings, stagnant growth, and both monetary and fiscal policy acting as a drag on economic activity.
In 2022, policy was “stepping on the gas,” and slamming the brakes was an obvious response as inflation peaked at 11.1%. Now, policy is already in “braking mode.” Simon French, chief economist at Panmure Liberum, noted, “This is not simply a repeat of 2022.”
The employment situation has deteriorated since 2022. In its upcoming rate decision, the Bank of England may signal whether it agrees with this assessment. Economists widely expect rates to remain unchanged this week. Before recent attacks in the Middle East disrupted oil and gas shipments through the Strait of Hormuz, markets had anticipated a 25-basis-point cut to 3.5%, with another cut later this year. Now, traders expect no cuts—instead, they fully price in a return to 4% by December.
Alongside its decision, the Monetary Policy Committee will provide an initial assessment of the Middle East conflict, which has pushed oil prices up 42% and natural gas prices up 57% since late February. The assessment may echo the view of David Miles, an economist at the Office for Budget Responsibility, who recently warned lawmakers that rising energy costs could add about one percentage point to inflation—pushing CPI to 3% in the second half of 2026, above the pre-conflict forecast of 2%. He also cautioned, “It is not yet clear which way things will go.”
Similarly, the Bank of England’s guidance is likely to emphasize uncertainty. David Aikman, director at the National Institute of Economic and Social Research, compared the current situation more to 2011 than 2022. Back then, rising oil and commodity prices pushed inflation to 5.2%, but the MPC refrained from raising rates, choosing instead to “look through” the shock. Then-Governor Mervyn King argued that tightening policy “would risk inflation being below the target in the medium term,” since the economy was already weak and higher energy prices would further dampen growth.
Similarly, before the latest Middle East escalation, the MPC had already turned its attention to rising unemployment—now at a five-year high. Inflation, though still at 3%, had been trending down toward the 2% target, and household inflation expectations had eased from 3.5% in January to 3.2% last month. Now, concerns over both labor market weakness and a potential inflation resurgence are mounting.
Economists Ana Andrade and Andrej Sokol noted that the conflict “reignites the familiar central bank dilemma—tackling inflation versus supporting weak demand.” Using a custom model, they estimate a 75% probability that unemployment will exceed the Bank of England’s forecast of 5.3% by mid-2026. The current labor market is almost entirely different from that during the last energy shock. In 2022, businesses struggled to hire, leading to record-high vacancies and wage growth above 8%. Today, job openings have nearly halved, unemployment has risen by around 600,000, and firms are no longer hoarding labor.
Moreover, interest rates at 3.75% are restraining growth, and reduced government borrowing this year has diminished fiscal stimulus. Additionally, the UK’s exposure to energy price spikes has decreased—in 2021, energy prices were set by marginal gas prices 90% of the time; that share has since fallen by about a third.
Some economists worry that, with inflation still at 3% and the public still remembering recent double-digit inflation, the Bank of England may not be able to look through this shock as it did in 2011. Paul Dales of Capital Economics warned that energy prices often influence inflation expectations significantly, and the central bank remains wary of a wage-price spiral. Recent internal Bank of England research suggests that once inflation reaches 3–4%, it becomes more likely to persist.
Sanjay Raja of Deutsche Bank added that the intense criticism the Bank faced for allowing inflation to reach 11.1% in 2022 may also influence its priorities: “We think labor market concerns will take a back seat for now.” However, like Andrade and Sokol, French doubts the Bank will significantly shift its stance due to past experience, noting, “The bar for hiking now is quite high. Policy is already restrictive, demand is weak, and sterling has held up well.”
A more optimistic scenario would see the conflict end quickly and energy markets stabilize. Edward Allenby of Oxford Economics suggested that if the shock proves temporary and recent price increases fully reverse, the Bank of England could still resume its rate-cutting cycle as early as April or June.
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