Rising oil prices could force up UK interest rates, say economists

A US warship stops a tanker under a blockade of Iranian ports and vessels. Renewed fighting has pushed up oil prices. Photograph: US Central Command/AFP/Getty Images View image in fullscreen A US warship stops a tanker under a blockade of Iranian ports and vessels. Renewed fighting has pushed up oil prices. Photograph: US Central Command/AFP/Getty Images Rising oil prices could force up UK interest rates, say economists Bank of England expected to keep rates on hold on Thursday but renewed Iran conflict casts 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. Before a meeting of Bank officials on Thursday, economists said that while an interest rate hike would probably be avoided this week there could be some in the future because of conflict in the Middle East. The UK economy has remained relatively resilient since Donald Trump’s war on Iran began in March, but this could be at risk after fighting reignited last week, the economists added. The breakdown of the fragile ceasefire between the US and Iran sent oil prices back to the highs seen in April and May, sparking fears that higher prices at the pumps would send inflation soaring. A barrel of Brent crude jumped above $100 a barrel (£75) on Thursday before falling back to $96 on Friday, well above the $71 recorded earlier this month. Gas prices have soared before the crucial period when most European countries refill their storage facilities in time for winter heating demand. All the major central banks say they are concerned about the impact of the war in the Middle East and its influence on rising prices. The Bank’s nine-member monetary policy committee is expected to vote on Thursday in favour of holding interest rates, and to continue maintaining them at 3.75% until at least December, by a margin of seven to two. This echoes their last meeting in June when two officials on the committee voted to increase rates to head off rising inflation. Sanjay Raja, the chief UK economist at Deutsche Bank, said that calculation might change if the intensity of airstrikes was maintained and the sea channels allowing tankers to enter and exit oil terminals remained blocked. He said: “We see upside risks to the interest rate outlook in the near term, with much dependent on the duration of the unfolding energy shock. A second energy wave will likely amplify uncertainty around the inflation path and the risk of second-round effects.” View image in fullscreen The Bank of England’s monetary policy committee is expected to vote on Thursday in favour of holding interest rates. Photograph: Henry Nicholls/Reuters George Buckley, the chief UK and euro area economist at Nomura, said financial markets were giving a clear signal that higher oil prices would translate into higher interest rates. “At $90 they would see the need for one and a half quarter-point hik