Economists have warned that a return of oil prices to above $100 a barrel could force the Bank of England to raise UK interest rates later this year, even as a hold is expected at Thursday's meeting.
Key facts
- City economists say rising oil prices could push up UK interest rates later this year.
- A rate hike is expected to be avoided at the Bank of England meeting on Thursday.
- The trigger point cited is oil prices returning above $100 a barrel.
- Renewed conflict in the Middle East, involving Iran, is casting a shadow over energy costs.
The Bank of England could be forced to tear up its economic forecasts and raise interest rates later this year if oil prices return to above $100 a barrel, according to City economists cited by the Guardian.
Ahead of a meeting of Bank officials on Thursday, economists said that while an interest rate hike would probably be avoided this week, there could be increases in the future because of conflict in the Middle East.
The warning links the outlook for UK monetary policy directly to global energy markets. Higher oil prices tend to feed through into fuel and wider costs, which can push up inflation and complicate the Bank’s efforts to keep price rises under control.
According to the Guardian, renewed conflict involving Iran is casting a shadow over energy costs, raising the prospect that oil could climb back above the $100 a barrel level that economists identified as a potential turning point for policy.
The Bank of England is still expected to keep rates on hold at Thursday’s meeting, suggesting policymakers are not moving immediately. However, the economists’ comments indicate that the direction of rates later in the year could hinge on how the situation in the Middle East develops.
For now, the message from City economists is one of caution rather than immediate action, with the near-term expectation of a hold accompanied by a warning that the picture could shift if energy prices rise sharply.
Why it matters
Interest rates directly affect the cost of mortgages, loans and savings for millions of people, so any move by the Bank of England has wide financial consequences. Because the warning ties UK rates to volatile oil prices and Middle East conflict, households and businesses face uncertainty over borrowing costs later in the year.
Frequently asked questions
Is the Bank of England raising interest rates this week?
No. Economists said a rate hike would probably be avoided at Thursday's meeting, with the Bank expected to keep rates on hold, according to the Guardian.
What could trigger a future rate rise?
Economists said oil prices returning to above $100 a barrel, driven by renewed conflict in the Middle East, could force the Bank of England to raise rates later this year.
Why do oil prices affect UK interest rates?
Rising oil prices raise energy costs, which can push up inflation. The Bank of England uses interest rates to manage inflation, so higher energy costs could prompt rate increases.