The prospect of another interest rate hike by the Bank of England has taken centre stage as global oil prices surge in response to escalating tensions in the Middle East. The Strait of Hormuz, a vital trade route for approximately one-fifth of the world's oil and gas supplies, is facing renewed disruption, pushing Brent crude above $73 per barrel – levels last seen during the Iran war. City economists are now warning that this sustained increase in global energy prices could push UK inflation beyond its target threshold of three per cent, potentially compelling the Bank to tighten monetary policy.
The Strait of Hormuz, a critical waterway for approximately one-fifth of the world's oil and gas supplies, is experiencing renewed trade disruption. This has led to a significant increase in oil prices, reaching levels not seen since the Iran war, and is dampening economic sentiment across trading floors. HSBC economist Elizabeth Martins highlighted that the return of conflict in the Middle East would likely make the Bank of England more cautious in its approach to monetary policy, suggesting that the prospect of normalising international trade flows remains 'elusive' for now.
While the Bank of England is widely expected to hold interest rates at 3.75 per cent at its upcoming meeting, some City analysts anticipate a hawkish shift within the Monetary Policy Committee (MPC). Both Chief Economist Huw Pill and external member Megan Greene are expected to advocate for a 25 basis point increase, a position they have previously supported. Catherine Mann, who has consistently raised alarms about sensitive inflation expectations among UK households and businesses, could also join the MPC members favouring a rate hike.
Official data released on Wednesday showed a slight dip in inflation, with the Consumer Price Index (CPI) falling to 2.6 per cent in June, down from 2.8 per cent the previous month. However, economists are predicting that a reset in the energy price cap from July will push CPI inflation back above three per cent. ING's James Smith stated that the Bank of England would be more inclined to raise rates if CPI inflation were to creep up to four per cent, which would be double its target rate, though he expects inflation to peak at 3.5 per cent by the end of the year.
UBS economist Anna Titareva noted that the current 'hawkish bias' within the MPC, combined with the risk of escalating conflict, leaves the 'door open to further rate hikes'. However, Titareva also suggested that the risk of higher inflation driving up wage growth could be managed due to the current state of the UK jobs market, which offers workers limited bargaining power for significant pay rises. She concluded that while rate hikes are not ruled out, they remain a 'risk scenario' rather than the primary expectation, with any potential hikes likely to be followed by relatively rapid rate cuts given the weaker economic starting point.