Rising oil prices due to Middle East conflict may prevent Bank of England rate cuts

From Yahoo Finance: 2025-06-16 08:22:00

Events in the Middle East, particularly Israel’s war with Iran, have caused a surge in oil prices, raising concerns about inflation. Economists warn that this could lead to interest rates remaining high for longer, impacting the Bank of England’s ability to control inflation.

Oil prices have risen from $65 to around $74 per barrel due to the conflict in the Middle East, threatening to push British inflation closer to 4%, double the Bank’s 2% target. This increase in energy costs could also trigger a wage-price spiral as workers demand higher pay.

The Bank of England is expected to keep rates at 4.25% but may cut borrowing costs in August to reach a 4% rate. However, events in the Middle East could force officials to maintain rates at 4% to prevent inflation from spreading throughout the economy, according to economist Robert Wood.

Inflation rose to 3.4% in April, the highest in over a year, with conflicting signals from a shrinking economy and weakening job market making it challenging for the Bank to determine appropriate interest rates. The conflict in the Middle East adds further unpredictability to the situation, potentially influencing MPC members’ decisions.

George Buckley, an economist at Nomura, noted that while higher oil prices could result in more expensive petrol, it may also deter business investment, slowing the economy and easing upward pressure on inflation. The impact of the Middle East conflict on the economy remains uncertain, with potential mixed consequences.

Read more: Bank of England urged to put brakes on rate cuts over Iran conflict