Bank of England holds rate, warns of hike if Iran war persists

The Bank of England held its benchmark interest rate at 3.75 percent on Thursday, but warned that a hike might be needed as the Middle East war pushes up energy prices.

The widely expected decision following a regular monetary policy meeting comes after the Federal Reserve on Wednesday lifted US interest rates for the first time since 2023, citing the need to combat surging inflation.

"So far higher energy costs have had a limited effect on price and wage setting in the UK," Bank of England governor Andrew Bailey said.

"But the longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise" the benchmark rate, he added.

Surging energy prices triggered by the Middle East war have led central banks around the world to shift in favour of tightening monetary policy.

The Bank of Japan is forecast to lift borrowing costs on Friday as it battles inflation, while the European Central Bank last week lifted interest rates for the second time this year.

Three members of the BoE's monetary policy committee voted to increase the UK rate by 0.25 percentage points, to four percent.

But Bailey joined the five remaining members in calling for no change for a sixth time in a row, minutes of the meeting showed.

The vote came after UK inflation climbed to 3.1 percent in August, far above the central bank's two-percent target.

The BoE expects price pressures to rise further, projecting inflation to reach four percent by the first quarter of 2027.

"If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten," the BoE said.

Concerns about inflation have sent global government bond yields surging to multi-decade highs in recent weeks.

Prime Minister Andy Burnham said Wednesday that he was ready to take "difficult decisions" on the economy as the government's budget update on October 28 looms.

Burnham and his finance minister John Healey face pressure to deliver their promise of easing the cost of living for households while maintaining strict fiscal discipline.