Bank of England Holds Rates, Warns of Inflation Threat from Iran War

• The Bank of England (BOE) kept interest ​rates on hold on Thursday, April 30, 2026, and set out a range of possible economic impacts from the Iran war, the worst of which might entail "forceful" rate rises, while less damaging outcomes may not require any increase ‌at all. Facing deep uncertainty about the duration of the conflict and the damage it will wreak on Britain's economy, the Monetary Policy Committee voted 8-1 to keep the BoE's benchmark Bank Rate at 3.75% as only Chief Economist, Huw Pill, sought a hike to 4%.
• The decision was in line with expectations in a Reuters poll of economists, but investors responded by scaling back their bets on BoE rate hikes this year. A day after the U.S. Federal Reserve kept rates unchanged, and shortly before the European Central Bank stayed ​on hold too, the MPC said it would monitor the Middle East closely.
• Faced with such deep uncertainty over the war, the BoE opted not to publish a central economic forecast. Instead, it produced three scenarios based on energy prices and different degrees of second-round effects. Britain is seen as highly vulnerable to the jump in energy prices due to its heavy use of natural gas.
• Under the most damaging Scenario C, where oil prices peak at $127 a barrel and remain above $100 until mid-2028, inflation could peak at 6.2% in early 2027. This is almost double its most recent reading, and projections indicate that prices would stay above the BoE's 2% target for the coming three years, based on current market expectations for rates. If that risk materialised, it was "likely to warrant a forceful tightening in monetary policy," the BoE ​said.
• However, Scenarios A and B - which show oil ​prices falling to around $80 a barrel within a few ⁠months - would require a "less restrictive policy stance" with the rise in market-based interest rates since the start of the war helping to offset inflation pressure. Governor Andrew Bailey thought the most likely outcome was Scenario B, under which inflation peaks at a little over 3.5% at the end of 2026 before falling back to close to 2%.
• Nevertheless, the BoE expressed that some MPC members "might prefer to act early," while others could wait for more evidence of inflation getting ​stuck too high. While there was a risk of "material second-round effects" from the energy price shock - such as demands for higher pay or companies raising prices rather than absorbing higher costs - the jobs market was weakening, and a rise in financial market borrowing costs would limit inflation.

(Source: Reuters)