Bank of England Poised to Raise Rates as Iran War Fuels Inflation

LONDON – The Bank of England is widely expected to raise interest rates on Thursday for the first time in more than three years as it responds to an inflation surge linked to the war in Iran.

With price growth forecast to accelerate in the months ahead, economists say the nine-member Monetary Policy Committee is likely to lift the bank’s key interest rate to 4% from 3.75%. If delivered, the increase would mark the first rate rise since August 2023.

Pressure on policymakers has built steadily. Inflation climbed to an 11-month high of 3.5% in September, well above the Bank of England’s 2% target, reinforcing expectations of a rate increase this month and possibly further hikes in 2027.

The principal driver of this year’s inflation spike has been a steep increase in energy costs. The war in Iran and resulting disruption in the Strait of Hormuz have constrained global oil and gas supplies, pushing fuel prices higher.

“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.”

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The expected rate decision will be accompanied by the Bank of England’s quarterly economic forecasts, including updated projections for inflation and economic growth. Higher borrowing costs typically restrain spending and price pressures, but they can also weigh on overall economic activity.

Other major central banks, including the U.S. Federal Reserve and the European Central Bank, have also raised interest rates in recent months as they confront persistent inflation.

U.K. interest rates had been falling from a 15-year peak of 5.25% before the United States and Israel launched attacks on Iran in late February.