Bank holds interest rates but says it is ready to raise them if Iran war escalates

The Bank of England has kept interest rates unchanged for the fifth meeting in a row but has indicated it could raise them if the Iran war escalates.

It expects inflation - the rate at which prices rise - to pick up due to volatile oil and gas prices caused by the Middle East conflict, although the peak will be slightly lower than previously thought.

While major uncertainties remain because of the war, the Bank predicts the UK economy will grow this year by more than previously forecast.

The Bank voted to hold interest rates at 3.75% at its latest meeting. It said any change in borrowing costs would depend on how long the energy shock will last and how severe it is.

Three members of the Bank's nine-member rate-setting committee voted for a hike, one more than the previous meeting.

Speaking at a news conference, Bank of England governor Andrew Bailey said: "If the conflict in the Middle East persists for an extended period... it's likely that we will have to tighten policy to counter inflationary pressures in the UK economy."

However, Bailey said the Bank was not currently moving towards raising interest rates.

"Please do not leave this room thinking that the Bank of England is edging towards a hike, because frankly, there's nothing in what I said, and I think any of us have said along those lines," he told reporters.

If the Iran war continues and oil prices hover around $100 a barrel, then a rate rise seems likely. But many in the markets expect tensions to subside in the coming weeks, ahead of crucial elections across the US in the autumn.

The Bank of England examined a range of scenarios of what might happen to inflation and the economy depending on the Middle East conflict.

Inflation was previously expected to reach 3.5% this year.

In a worst-case scenario, where oil prices reach $100 a barrel, the Bank now projects that inflation could reach 3.2% in 2026.

In a scenario where oil prices are around $76 before falling back to $71, inflation could reach 3%.

While better than previously forecast, that remains above the Bank of England's 2% target.

The UK economy is expected to grow by 1.1% this year, ahead of forecasts the Bank made in April.

The Bank of England is ready to raise rates if the war in the Gulf continues to escalate, leading to higher oil costs and, in particular, elevated gas prices as Europe refills its storage capacity ahead of winter.

But the judgement on that changes day to day, depending on the responses of the US and Iran. If, as seemed to be the case just a month ago, a ceasefire returns and holds, then energy prices could fall rapidly and raise the prospect of a rate cut.

Megan Greene, one of the three members of the Bank's rate-setting committee who voted to raise rates to 4%, said that while there was uncertainty because of the Iran war, other "risks loom" over inflation.

These include a second choke point for global energy supplies in the Red Sea – Houti rebels in Yemen recently attacked oil tankers passing through the region.

There are also new factors that the Bank is considering. Droughts around the world and the prospect of a "super El Niño" weather pattern could hike food prices.

The price of technology could also be affected by the current convulsions in the market for microchips.