The Bank of England's Monetary Policy Committee (MPC) announced on Thursday its decision to hold interest rates steady at 3.75%. Senior UK central bankers believe that the conflict in the Middle East is the only factor preventing a rate cut, as it poses a threat of high inflation to the UK economy.
The MPC stated that underlying inflationary pressures are largely absent in the domestic economy, with prices stable and expected to rise at the central bank's 2% target without the conflict. However, officials are concerned that retail prices could increase if companies exploit consumer expectations of war-driven production cost rises, or if workers demand significant wage increases due to anticipated inflation.
Despite these concerns, the Bank has not yet observed these trends. The spillover effects from rising energy and transport costs remain muted, and supermarkets have kept food inflation low. Services companies have also managed to restrict price increases this year.
The Bank's quarterly review noted, "So far, there are few signs of second-round effects. But there is not enough evidence yet to rule out this risk, and the MPC will continue to monitor evidence closely." Annual wage increases in the private sector were 2.8% in the second quarter and are projected to reach 3% in the third quarter, a level deemed acceptable by Bank officials.
The Bank's forecasters anticipate inflation to peak at 3.2% next spring, but warn it could reach 4.1% if the conflict persists and Brent crude prices exceed $100 a barrel. The National Institute of Economic and Social Research reported that the UK has already lost an estimated £28bn in growth this year due to the Middle East conflict.