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The Bank of England is expected to keep interest rates unchanged Thursday even though inflation in the United Kingdom has risen to a five-month high as the fallout from the Iran war continues to ratchet up fuel prices.
Economists expect a majority of the nine-member Monetary Policy Committee will want to see more evidence that higher inflation is feeding into underlying prices and wages and will therefore vote to keep the bank’s main rate unchanged at 3.75% for the sixth consecutive meeting.
Official figures released Wednesday showed that rising prices at the pump and airfares were largely behind the increase in the U.K.’s consumer prices index to 3.1% in August from 2.9% the month before. The increase moved inflation further above the Bank of England’s 2% target.
David Rees, head of global economics at Schroders, is one of the many economists who think interest rates will be held because the economic backdrop, such as wages and the labor market, remains relatively soft.
“That should limit the extent to which imported price pressures become embedded in domestic wages and prices,” he said.
Many economists are forecasting higher inflation in coming months as households face another increase in their domestic energy bills beginning in October. As a result, the consensus in financial markets is that interest rates will be raised at one of the next two meetings, either in November or December.
Interest rates in the U.K. had been trending downward from a 15-year high of 5.25% until the U.S. and Israel attacked Iran in late February. The Iran war led to sharp increases in oil and gas prices, partly because the crucial Strait of Hormuz has been largely closed to traffic ever since.
As well as impacting the cost of personal loans and mortgages, the uptick in interest rate expectations is a growing problem for the British government as the servicing of its debt accounts for a higher proportion of its spending.