As the war in the Middle East continues to push up energy prices and foster heightened fears about inflation, the Bank of England held interest rates steady on Thursday. The decision to not raise rates this month makes it an outlier among other large global central banks.
Policymakers at the central bank held rates at 3.75 percent, where they have been since late last year. The decision was announced a day after data showed inflation in Britain had risen to 3.1 percent in August, the fastest pace of price growth since March, driven by higher gasoline and diesel prices. It also follows the decision by the U.S. Federal Reserve to raise interest rates on Wednesday, its first increase in more than three years.
But officials at the Bank of England said the protracted conflict in the Middle East was increasing the probability that they would need to raise interest rates soon.
“So far higher global energy costs have had a limited effect” on how companies set prices and wages, Andrew Bailey, the governor of the Bank of England, said in a statement. “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 Bank Rate” to ensure inflation falls back to the central bank’s target, he added.
For weeks, pressure has been growing on the bank to act as policymakers had already warned that the longer the war in the Middle East goes on, the worse its impact will be on inflation. The bank aims for stable inflation at an annual rate of 2 percent. This week, the price of Brent crude has stayed above $100 a barrel and European natural gas prices are at their highest in more than three years. Next month, the average household energy bill will increase about 4 percent, even with government measures to limit the increase.
In recent weeks, investor concerns about inflation and high public debt loads have propelled a sell-off in global government bonds. These higher borrowing costs added to expectations that central banks will raise interest rates. Last week, the European Central Bank raised rates for a second time since the start of the war, and the Bank of Japan is expected to increase rates on Friday.
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