LONDON (AP) — The Bank of England is expected to raise interest rates Thursday for the first time in over three years in order to tackle the inflation shock caused by the Iran war.
With inflation predicted to rise further over the coming months, economists reckon the nine policymakers on the Monetary Policy Committee have little option but to increase the bank's key rate to 4% from 3.75%. The anticipated increase would be the first since August 2023.
The pressure on rate-setters has grown steadily over recent months, but the rise in inflation to an 11-month high of 3.5% in September — above their target of 2% — cemented market expectations of a rate hike this month and potentially more in 2027.
The main cause behind the spike in inflation this year has been the sharp rise in fuel costs as a result of the Iran war and the ensuing bottlenecks in the Strait of Hormuz, which have squeezed global oil and gas supplies.
“We imagine that many committee members’ patience with the recent rise in inflation has worn thin," said Ellie Henderson, an economist at Investec. “The longer energy prices remain elevated, the greater the risk that a temporary price shock becomes more permanent."
Accompanying the expected rate hike will be the bank’s quarterly economic projections, notably those for inflation and growth. Higher interest rates cool the economy by making it more expensive to borrow, thereby bearing down on spending and inflation, but growth too.
Other central banks, including the U.S. Federal Reserve and the European Central Bank, have raised rates recently in response to rising prices.
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.
