Bank of England policymakers will “almost certainly” hold interest rates at 3.75% at their meeting next week despite the Iran war pushing up the cost of living, economists have said.
However, experts have said a future interest rate increase could still be a possibility if firms and households continue to face inflationary pressure.
The Bank of England’s nine-strong Monetary Policy Committee (MPC) will vote on whether to maintain, increase or decrease its base interest rate on Thursday April 30.
The Bank will also publish its first full monetary policy report and set of economic forecasts since the conflict between US-Israeli and Iranian forces began in late February.
This week, a raft of economic data has shown that the conflict has helped to drive inflation higher.
Data published by the Office for National Statistics (ONS) on Wednesday showed that UK Consumer Prices Index (CPI) inflation lifted to 3.3% in March, a three-month-high, on the back of accelerating fuel prices.
The price of motor fuels jumped by 8.7% month-on-month – the largest increase since June 2022 – as disruption to oil production and transportation drove diesel and petrol prices higher.
Meanwhile on Friday, Bank of England research saw UK firms warn they think food inflation could jump as high as 7% as they increased their inflation outlook for next year.
Other economic data also indicated that activity in the UK economy has been stronger than expected.
The ONS reported the UK economy grew by 0.5% in February, ahead of forecasts of 0.1%, before the conflict began.
Elsewhere, UK retail sales volumes were stronger-than-expected after a boost from fuel, with motorists buying more in March in a bid to stock up amid rising prices.
Despite these figures, economists broadly expect the Bank’s rate-setters to maintain the current interest rate.
Oxford Economics chief UK economist Andrew Goodwin said: “We expect the MPC to keep bank rate unchanged at 3.75%, with most committee members seemingly keen to hold policy at its current restrictive level as they gather more information about how the energy shock is feeding through to the economy.
“Nevertheless, we suspect a minority will opt for a 25 basis point (0.25 percentage point) hike, on the basis that some pre-emptive tightening is a more robust strategy to guard against an inflation outlook where the risks are skewed to the upside.”
Thomas Pugh, chief economist at RSM UK, said the result of the meeting looks “nailed on”.
He said: “The Bank of England (BoE) will almost certainly hold interest rates at 3.75% at its meeting next week, most likely in a unanimous 9-0 vote again.
“The picture of the war in Iran is little clearer than at the last meeting and the value in waiting for more information is significant, given the uncertainty over both the future direction of energy prices and their impact on the economy.”
He indicated however that the “resilience” of some recent data “raises the risk that interest rates will rise in the summer”.
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, also predicted a unanimous hold vote but also suggested that recent data could drive future concerns over elevated inflation.
He said: “If surveys for May repeat the same pattern, and crucially the ‘dirty’ Middle East ceasefire continues with oil flows disrupted, we think the MPC will be bumped into a hike in June or perhaps July.
“We expect rate setters to hike once this year, in June, before cutting twice in 2027 to leave interest rates at 3.5%.”