By Paul Hannon
The Bank of England Thursday signaled that it is prepared to raise its key interest rate to counter a pickup in inflation driven by the conflict in the Middle East, but won't rush into a move as the duration and scale of the disruption to energy supplies remain uncertain.
Before attacks on Iran by the U.S. and Israel late last month, the U.K.'s central bank had been expected to lower borrowing costs at this week's meeting of its policymakers. That would have eased the restriction it has placed on a near-stagnant economy that has seen a pickup in unemployment over recent months.
However, the conflict has sent energy prices surging, while its impact on fertilizer costs is likely to see a revival of food inflation. Oil and gas prices surged again Thursday after some of the world's most critical energy facilities were hit in a fresh wave of attacks in the Middle East, stoking fears of deeper and more prolonged disruptions to global supplies.
As a result, the U.K. economy is likely to grow more slowly than the BOE forecast last month.
Instead of cutting, the BOE left its key interest rate at 3.75%, a reflection of how the conflict has changed the outlook for economies around the world. In doing so, the BOE matched the Federal Reserve's decision Wednesday. The Bank of Canada and the Bank of Japan have made the same call, as have the central banks of Sweden and Switzerland earlier Thursday. The European Central Bank is soon expected to follow suit later Thursday.
The BOE said it would act to counter the pickup in inflation if it threatened to become persistent, but faced high levels of uncertainty about the outlook and would seek greater clarity before deciding on the path for interest rates.
"I will be monitoring developments extremely closely and stand ready to act as necessary to ensure inflation remains on track to meet the 2% target," said Gov. Andrew Bailey.
The decision was unanimous, and backed by four policymakers who had called for a rate cut in February. That indicates that a cut is unlikely in the coming months, although an early end to the war and the disruption to energy supplies would revive calls for lower borrowing costs.
"If we see something resembling the lower-inflation scenario, I would expect to reduce Bank rate, possibly quickly, over the rest of the year, " said Swati Dhingra, one of those who voted for a cut at the previous meeting.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
March 19, 2026 08:08 ET (12:08 GMT)
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