The impact of the Iran war on long-term inflation pressure in the UK will become clearer this winter, according to Swati Dhingra, a member of the Monetary Policy Committee (MPC) of the Bank of England. Dhingra expressed this opinion during a conference held by the National Institute of Economic and Social Research (NIESR) on September 24.
“I believe the key timing here is that we will see trends emerging from winter energy pricing, as well as have a clearer picture of the outcome of wage agreements and the current financial market pricing conditions,” Dhingra stated. She noted that the UK has not experienced widespread and comprehensive price increases similar to those seen during the outbreak of the Russia-Ukraine war in 2022, and that the job market in the UK is currently weaker than it was at that time.
Formerly one of the most active supporters of lowering borrowing costs during interest rate cuts at the Bank of England, Dhingra has recently voted in line with the majority of the Monetary Policy Committee to maintain borrowing costs unchanged.
On September 17, the Bank of England announced that it would maintain the base rate at 3.75%, with the Monetary Policy Committee passing the decision by a vote of 6 to 3; three members advocated for raising the rate to 4%. The ongoing conflicts in the Middle East have heightened oil and fuel prices, leading to increased inflation risks in the UK compared to July.
Data from the UK’s Office for National Statistics (ONS) shows that the Consumer Price Index (CPI) rose by 3.1% year-on-year in August, up from 2.9% in July. Transportation, especially automotive fuels, was a key contributor to the inflation in that month. The Bank of England indicated that based on energy price calculations as of September 14, the CPI inflation rate could rise to around 3.75% in the fourth quarter of 2026 and slightly exceed 4% in the first quarter of 2027.
Minutes from the September meeting of the Bank of England showed an increased market expectation of near-term interest rate hikes. According to a September 18 report from Reuters, currency market traders expect a 65% likelihood of a rate hike in November by the Bank of England, with an anticipation of four cumulative rate hikes by the end of 2027, each at 25 basis points.
However, Bank of England Governor Andrew Bailey stated that there is significant uncertainty in the current economic outlook, and it is unclear whether market expectations of multiple future rate hikes are reasonable. Energy prices are a key variable in this equation.
The Bank of England emphasized that the Middle East conflict has caused further increases in crude oil and fuel prices, leading to increased volatility in energy prices. While monetary policy cannot directly influence global energy prices, the Bank needs to ensure that energy price shocks do not escalate into broader and sustained inflationary pressures.
Bailey also noted that there are currently no clear signs of energy prices further driving up wages and other prices, but the longer energy prices remain high, the greater the risks become.