“Inflation has fallen faster than we’ve expected, but the conflict in the Middle East continues to mean high and volatility energy prices,” said BoE Governor Andrew Bailey.
In the U.K. and EU, the U.S.-Iran temporary ceasefire brought hopes to policymakers that the impact of the conflict could be short-lived, with signs of resilience in the economy, amid lower services and food inflation, slowing wage growth and a soft labor market.
The European Central Bank was the first major central bank to raise rates in June in a bid to ensure price stability, but held in its July meeting after eurozone inflation came in lower than expected last month. The U.K., too, saw inflation falling in June — to 2.6 percent — before the conflict re-escalated.
But, with Britain predicted to take the biggest economic hit of any major country from the Iran war, the path ahead appears particularly uncertain, according to the central bank’s projections, and will depend just how far energy prices spiral driven by the on-again off-again nature of the war.
“The U.K. is an open economy, so obviously we look at world conditions and of course in some ways never more so than at the moment, given what’s going on in the wider world and particularly the conflict in the Gulf,” Bailey told journalists in a press conference following the MPC decision.
The central bank modeled various scenarios to assess the possible impact of the ongoing war. In an adverse scenario, where there is a repeated re-escalation of the conflict, prices start sticking throughout the economy and inflation peaks at 4.5 percent in the second quarter of 2027.