Key facts
- The Bank of England warned that a prolonged US-Iran conflict could push UK inflation to 4.5% by the second quarter of 2027.
- The central bank decided to keep interest rates on hold.
- Inflation is projected to peak at 3.2% in the last quarter of 2026 under a central scenario.
- A milder scenario predicts inflation peaking at 3% by the end of 2026.
- MPC member Catherine Mann voted for a rate hike due to Middle East conflict and energy price volatility.
The Bank of England has warned that escalating conflict between the U.S. and Iran could significantly impact the British economy, potentially driving inflation to a peak of 4.5% in the second quarter of 2027. Chief Economist Huw Pill noted a risk of gradual, long-term inflation pressures building due to energy price jumps triggered by the conflict. Governor Andrew Bailey stated that while inflation has fallen faster than expected, the ongoing conflict in the Middle East presents a risk of high and volatile energy prices.
The Bank's Monetary Policy Committee decided to hold interest rates steady by a 6-3 vote, with member Catherine Mann voting for a 0.25% rate increase, citing the conflict and associated energy price volatility. The central bank modeled several scenarios: an adverse scenario with repeated conflict re-escalations could see inflation peak at 4.5% in Q2 2027; a central projection forecasts inflation peaking at 3.2% in the last quarter of 2026; and a milder scenario predicts inflation peaking at 3% by year-end.
The Bank factored in potential inflation shocks from investment in artificial intelligence components and higher food prices due to the El Niño weather phenomenon. Pill indicated that it would not be possible to tell until later in the year if more "slow-moving but maybe more insidious second-round effects" were developing.