LONDON: The Bank of England on Thursday left its benchmark interest rate unchanged at 3.75 percent, but signalled hikes could be needed if the Middle East war continues to drive up inflation.
The central bank also cut its forecasts for UK growth in 2026 and 2027 as the global energy shock weighs on the economy.
BoE governor Andrew Bailey said the interest rate was at a “reasonable place given the situation of the economy and the unpredictability of events in the Middle East.”
“Whatever happens, our job is to make sure that inflation gets back to the two percent target after the initial impact of the war on energy prices has passed,” he added.
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The central bank now estimates gross domestic product growth to hit 0.7 or 0.8 percent this year and 0.8 or 1.0 percent in 2027.
It had previously forecast GDP output of 0.9 percent this year and 1.5 percent in 2027.
The BoE took the unusual step of publishing three forward-looking scenarios for the UK economy.
All three suggest that rates will need to rise, but in the worst-case scenario, inflation could climb to 6.2 percent in the first quarter of 2027.
In that scenario, the oil price would have to stay around $130 a barrel for an extended period, with gas prices soaring further.
Policymakers including Bailey voted 8-1 to hold the benchmark rate on Thursday, with one dissenter voting in favour of hiking by 0.25 percentage points.
The decision came as the European Central Bank prepared to hold interest rates steady again as policymakers weigh concerns about higher inflation against weakening growth.
The Federal Reserve held interest rates steady Wednesday, its third pause in a row, as it also waits for the full impacts of the war to become clear.
The BoE last cut its interest rate by a quarter-point to 3.75 percent at its policy meeting in December.
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