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Rising oil prices could force up UK interest rates, say economists
City economists warn that the Bank of England could be forced to abandon its current forecasts and raise UK interest rates later this year if oil prices climb back above $100 a barrel, following renewed conflict in the Middle East. The Bank's monetary policy committee is expected to keep rates on hold at its meeting on Thursday, but the resumption of fighting after the collapse of a fragile US-Iran ceasefire has revived fears that higher fuel costs could reignite inflation, putting future rate rises back on the table.
Brent crude briefly rose above $100 a barrel before easing to $96, well up on the $71 recorded earlier this month, while gas prices have also risen ahead of Europe's winter storage refill period. The Bank's nine-member committee is expected to vote seven to two in favour of holding rates at 3.75% until at least December, mirroring its June decision. Economists including Deutsche Bank's Sanjay Raja and Nomura's George Buckley said sustained oil prices around $90-$100 could require one to two quarter-point rate hikes, while Mohamed El-Erian of the University of Pennsylvania warned that oil above $90 a barrel could drive up food and transport costs through broader "second-round" inflationary effects.
In short
- Bank of England expected to hold rates on Thursday despite oil price surge
- Renewed Iran conflict pushed Brent crude above $100 a barrel
- Economists warn sustained high oil prices could force future rate hikes
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Oil price increases create genuine inflationary pressures that extend beyond fuel costs alone, affecting food and transport prices through the supply chain. The Bank of England's primary mandate is price stability, and it cannot simply ignore a significant upward shock to a critical commodity. Preemptive rate rises may be necessary to anchor inflation expectations before they become embedded in wage and pricing behaviour, potentially requiring much larger increases later.
The case against
Crude oil prices are volatile, externally determined commodity prices that reflect geopolitical shocks the Bank of England cannot influence. Raising rates in response to temporary supply-side inflation risks unnecessary economic damage to borrowers and growth when underlying demand-driven inflationary pressures remain subdued. The Bank should distinguish between persistent, structural inflation and temporary commodity price movements, and avoid policy overreaction to external shocks that may reverse quickly.
Explained simply
The Bank of England sets the base interest rate that banks charge each other for borrowing money. This affects what ordinary people and businesses pay: mortgages, personal loans and savings accounts all move broadly in line with it. When the Bank raises its rate, borrowing becomes more expensive; when it cuts, borrowing becomes cheaper.
Oil prices affect inflation, which is the rate at which prices across the economy are rising. Petrol, heating and electricity all depend on oil, and oil is used in countless products from plastics to packaging. When oil prices jump, businesses face higher costs to produce and deliver goods, which they pass on to shoppers through higher prices.
Tensions in the Middle East have sent oil prices sharply higher in recent weeks, raising concerns about inflation. The Bank of England was planning to hold interest rates steady, but economists now warn that if oil prices remain elevated, the Bank may need to raise rates. Higher rates would make mortgages and loans more expensive for UK households.
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