Bank of England holds rates as Strait of Hormuz crisis sends inflation forecasts spiralling
The Bank of England’s Monetary Policy Committee (MPC) has voted to keep Bank Rate at 3.75%, citing the sudden surge in global energy prices triggered by the escalating conflict in the Middle East.
In its Monetary Policy minutes published on Thursday (19 March), the central bank said the outbreak of hostilities between Israel, the United States, and Iran has caused shipping through the Strait of Hormuz to almost grind to a halt.
The strait carries roughly one-fifth of global oil and liquefied natural gas supply. Oil prices have rocketed as a result. Brent crude was trading above $100 per barrel ahead of the meeting, roughly 60% higher than at the time of the February Monetary Policy Report and the highest level since 2022.
European wholesale gas prices have jumped 60%, while UK natural-gas futures contracts that feed into the next Ofgem price cap have risen 35-40%.
UK CPI inflation is now projected to stay uncomfortably high for longer. Staff forecasts show inflation climbing to nearly 3.5% in March. This is almost half a percentage point above the February projection and hovering around 3% in the second quarter – far from the 2.1% previously expected.
By the third quarter, the direct hit from energy alone could add three-quarters of a percentage point, with indirect pass-through from businesses potentially pushing the headline rate as high as 3.5%.
“Monetary policy cannot influence global energy prices but aims to ensure that the economic adjustment to them occurs in a way that achieves the 2% target sustainably,” the MPC said.
The committee added it is “alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting,” especially if higher energy costs persist.
Bad timing
Before the conflict, UK disinflation was proceeding, with CPI at 3.0% in January and private-sector wage growth slowing to 3.3%. The economy was also operating below potential, with GDP growth subdued and unemployment steady at 5.2%.
Now, the MPC is weighing a classic supply-shock dilemma: higher near-term inflation versus the risk that elevated energy bills squeeze real incomes, dent confidence, and widen the output gap.
The market-implied path for Bank Rate has shifted higher, equity prices have fallen across advanced economies, and corporate bond spreads have widened. Sterling was little changed, while the dollar strengthened.
In individual statements, MPC members struck a cautious tone:
- Governor Andrew Bailey highlighted the upside risks from prolonged disruption to oil, gas, fertiliser, and neon supplies, noting households and businesses may be “more sensitive to a new inflationary shock” after years of elevated inflation.
- Sarah Breeden said she would have voted to cut rates absent the shock but now sees “risks to both sides.”
- Swati Dhingra described the economy as “at a crossroads,” warning that severe supply constraints could force a hold, or even a hike, while a milder scenario might still allow cuts later in the year.
- Others, including Megan Greene and Catherine L Mann, pointed to the risk that energy and food prices become particularly “salient” for inflation expectations, potentially re-embedding persistence.
All nine members agreed the next six weeks will be critical for gauging the conflict’s duration and its second-round effects.
“The Committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices,” the minutes state. “It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”
