The Bank of England has warned it may have to put up interest rates as it sounded the alarm over Donald Trump’s Middle East war driving up inflation and unemployment.
Governor Andrew Bailey said the impact was already being felt by consumers as petrol prices surge and could feed into higher energy bills later this year.
Rate-setters at the Bank voted unanimously to keep rates on hold at 3.75 per cent. But the Bank’s nine-member Monetary Policy Committee warned that if the crisis continues borrowing costs will have to go up.
It said that a ‘larger or more protracted shock’ which risks higher wage demands as the cost of living rises ‘would require a more restrictive policy stance’.
The Bank was also watching for the prospect that the crisis causes an economic downturn that ‘could result in a more rapid or larger rise in unemployment’.
Mr Bailey said he was ‘monitoring developments extremely closely’ after the war sent oil and gas prices surging.
He said he was ‘ready to act as necessary to ensure that inflation remains on track to meet the 2 per cent target’ in the medium term.
That opens the door to the possibility of a rate hike as soon as its next meeting in six weeks, at the end of April – or even that it might convene an emergency meeting before then as events in the Middle East unfold.
According to bets on financial markets, there is a near-60 per cent chance of a rate hike next month followed by two more before Christmas – taking rates to 4.5 per cent.
The Bank of England could be forced to raise interest rates to combat inflation
The Bank’s gloomy language confirms that hopes of rate cuts – which had been expected this spring until the war broke out – have now been squashed.
It said the surge in oil and gas prices has derailed hopes that inflation will fall back to its 2 per cent target by this spring.
Instead, the Bank believes inflation will climb to 3.5 per cent by the summer.
Mr Bailey said: ‘War in the Middle East has pushed up global energy prices.
‘You can already see that at the petrol pump and, if it lasts, it will feed into higher household bills later in the year.
‘The best way to tackle this is at the source by reopening energy supply lines.
‘We have held interest rates at 3.75 per cent as we assess how events unfold.
‘Whatever happens, our job is to make sure inflation gets back to its 2 per cent target.’
The MPC decision comes as oil and gas prices surge further and stock markets suffer a fresh sell-off in the wake of escalating violence overnight.
Bank rate-setters noted that even if the war proves short-lived, delays in energy production and ‘lingering instability’ could leave energy prices ‘elevated for a period of time’.
A protracted crisis could mean wider supply chain disruptions, stoking even more inflation, disrupting air and sea transport, fertiliser supply, and trade.
The Bank also predicted that inflation will be close to 3.5 per cent in March, half a point higher than it predicted last month.
And it noted that some mortgage borrowers were already feeling the pressure as lenders put up rates.
The energy price shock has come at a time when economic activity is already ‘subdued’ with growth flatlining in January.
It also noted that the jobs market remained ‘weak’ – with figures earlier showing unemployment stuck at 5.2 per cent.
The Bank’s regular survey of business conditions, conducted even before the outbreak of war, suggested that firms were gloomy even before then.
‘The overall picture is still lacklustre, and contacts remain cautious in their expectations for real activity,’ it found.
‘There is little evidence of consumer spending rallying so far this year.’
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