Bank of England could raise UK interest rates amid conflict

Andrew Goodwin, chief UK economist at Oxford Economics, has suggested that the Bank of England may raise rates to guard against rising inflation, particularly if the conflict in the Middle East keeps energy prices elevated.

The Bank of England is expected to announce its latest decision on April 30, with most economists predicting that rates will stay at 3.75 per cent.

This follows a recent rise in inflation, driven largely by higher fuel prices linked to the ongoing conflict between US-Israeli and Iranian forces.

Mr Goodwin said: “We expect the MPC to keep bank rate unchanged at 3.75 per cent, with most committee members seemingly keen to hold policy at its current restrictive level as they gather more information about how the energy shock is feeding through to the economy.

“Nevertheless, we suspect a minority will opt for a 25 basis point (0.25 percentage point) hike, on the basis that some pre-emptive tightening is a more robust strategy to guard against an inflation outlook where the risks are skewed to the upside.”

Consumer Prices Index (CPI) inflation climbed to 3.3 per cent in March, according to the Office for National Statistics.

This rise was fuelled by an 8.7 per cent month-on-month increase in motor fuel prices – the largest jump since June 2022 – as oil production and transport were disrupted by the conflict.

Economic data has also pointed to stronger-than-expected growth, with the UK economy expanding by 0.5 per cent in February, above the forecast of 0.1 per cent.

Retail sales were boosted in March, with motorists buying more in a bid to stock up amid rising prices.

Despite this economic activity, most analysts believe the Bank will hold rates steady for now.

Sandra Horsfield, economist for Investec, said: “We expect the MPC to keep the Bank rate on hold at 3.75 per cent this time, as it did at the March meeting.”

She noted that although the US’s indefinite ceasefire is in place, uncertainty remains high, and the effects are still being felt across the economy.

Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, predicted that the MPC will vote unanimously to hold rates.

However, he warned that if current trends continue, a rate rise could be on the horizon.

He said: “If surveys for May repeat the same pattern, and crucially the ‘dirty’ Middle East ceasefire continues with oil flows disrupted, we think the MPC will be bumped into a hike in June, or perhaps July.”

The Bank’s decision will be announced one day after the US Federal Reserve reveals its own policy decision.