The Bank of England could be compelled to revise its economic forecasts and potentially increase interest rates later in 2026, should oil prices remain above $100 a barrel. This warning comes from City economists ahead of a crucial meeting of the Bank's Monetary Policy Committee (MPC) this Thursday. While an immediate interest rate hike is largely not anticipated this week, the escalating conflict in the Middle East is casting a significant shadow over future energy costs and their impact on the UK economy.
The UK economy has demonstrated a degree of resilience since the conflict between the US and Iran began in March 2026. However, this stability is now under threat following a resurgence of fighting last week and the breakdown of a fragile ceasefire. This renewed tension has seen Brent crude oil prices surge, briefly topping $100 a barrel (£75) last Thursday before settling at $96 on Friday. This figure remains considerably higher than the $71 recorded earlier in July, sparking concerns that elevated prices at the pumps will fuel inflation across the country.
Sanjay Raja, Chief UK Economist at Deutsche Bank, highlighted the significant upside risks to the interest rate outlook, stating that much depends on the duration of this unfolding energy shock. He warned that a 'second energy wave' would likely amplify uncertainty surrounding the inflation path and the risk of broader economic impacts. Similarly, George Buckley, Chief UK and Euro Area Economist at Nomura, indicated that financial markets are already signalling a clear link between higher oil prices and the need for interest rate increases, suggesting that sustained prices above $90 a barrel could necessitate multiple quarter-point hikes.
The Bank of England's nine-member MPC is widely expected to vote in favour of maintaining interest rates at 3.75% this Thursday, with a seven-to-two majority anticipated to keep them at this level until at least December. This mirrors their decision in June, where two officials voted for an immediate rate increase to counteract rising inflation. However, Mohamed El-Erian, a professor at the University of Pennsylvania and former IMF chief economist, suggested that a sustained increase in oil prices to $90 a barrel could be enough to force UK policymakers to rewrite their forecasts, leading to heightened market expectations of a rate hike.
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, outlined a worst-case scenario where inflation could rise to 7% over the coming months in response to the Middle East conflict. In such a situation, UK interest rates could climb from the current 3.75% to 4.75%. This potential increase would represent a significant shift from the Bank's current stance, reflecting the acute pressure that global energy market volatility could place on domestic economic policy.