Inflation could hit 6pc, warns Bank of England

Andrew Bailey said there were ‘paths where we don’t have to increase rates and paths where we do’ - ANDY RAIN/EPA/Shutterstock

Inflation could surge past 6pc if the war in the Middle East triggers a prolonged energy price shock, the Bank of England has warned.

Policymakers voted to keep borrowing costs on hold at 3.75pc even as Andrew Bailey, the Bank’s Governor, warned of further price rises.

The Bank warned that under its worst-case scenario—a drawn-out war leading to $100 a barrel oil into 2028—inflation would peak at 6.2pc

This would require a “forceful” increase in borrowing costs that could take interest rates above 5pc.

However, Mr Bailey sought to allay fears of imminent rate hikes, adding that policymakers were also concerned about a weaker economy.

Unemployment is now set to climb above two million for the first time in more than a decade.

Mr Bailey said modest price rises that did not trigger higher wage demands would allow the Bank to proceed “without further increasing rates”.

His comments helped send the FTSE 100 up as much as 1.7pc and pushed down the cost of government borrowing, with the yield on two-year UK gilts dropping by 0.1 percentage points to 4.45pc.

Brent crude oil prices briefly reached a four-year high amid uncertainty on an Iran deal before dropping back.

Sanjay Raja, chief UK economist at Deutsche Bank, said the Bank of England had “bought itself time” by holding interest rates, but said the next move was more likely to be up than down.

He said: “Today’s ‘active hold’ kicks the can of a rate hike down the road – at least to July, in our view. The longer the energy shock lasts, the higher the likelihood of rate hikes. And the more the Bank staff’s short-term projections are tested, the harder it will be for some on the committee to remain on the sidelines. Given elevated geopolitical uncertainty, risks of multiple rate hikes can no longer be discounted.”

Policymakers said living standards were already falling, dealing a blow to Sir Keir Starmer’s pledge to raise them faster than any other G7 economy.

Mr Bailey said some of the “largest” price rises would be seen at the supermarket as the Bank warned of a renewed squeeze on living standards.

Food inflation is predicted to hit 7pc by the end of the year because of higher fertiliser costs. Some experts warn that food prices could see double-digit inflation by December.

It estimated the conflict would add £80 to monthly mortgage payments and push typical gas and electricity bills towards £2,000 by the summer.

The Bank set out three scenarios for how the Iran war could affect the economy in its latest Monetary Policy Report.

If the conflict ends soon and oil prices fall back below $80 a barrel by the start of next year, the Bank predicted inflation would peak at 3.6pc, up from 3.3pc in March. Unemployment would rise above two million by the start of 2027 and growth would also likely to be materially weaker at 0.8pc this year and 1pc in 2027.

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However, it warned that continued disruption keeping oil prices above $100 a barrel until the start of 2028 would push inflation above 6pc within a year, while unemployment would peak at 2.1 million by the end of 2027.

Mr Bailey described current market predictions for a quick drop in oil and gas prices if the conflict is resolved as “too optimistic” as he warned that restoring energy supplies would take time, even if the conflict was resolved quickly.

However, he added that “it would be a mistake to wait” for sharper pay rises to materialise before hiking rates.

Policymakers signalled that a scenario where inflation peaks near 4pc and oil and gas prices fall back more slowly was more plausible.

Under this scenario, Mr Bailey said it might still be possible to keep interest rates on hold to steer inflation back to target.

“It is not the case that we’re giving some sort of slightly clandestine message that interest rates are going to go up,” he said.

Deputy Governor Clare Lombardelli said the Bank would continue to analyse households’ response to higher prices, including through inflation expectations, pay deals, and consumers’ willingness to dip into their savings to cope with higher prices.

Huw Pill, the Bank’s chief economist, called for an immediate rate hike to 4pc to keep inflation under control in the 8-1 split vote.

He warned that there was a significant risk that inflation remained “persistent” and said a rate hike now would reduce the likelihood of price rises becoming entrenched in the economy.

06:21pm

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06:15pm

Volatility of energy prices and the conflict is a challenge, warns Bailey

Rapid changes in energy prices and continued uncertainty about the economic impact of the Iran war is making policymakers judgments “much more difficult” Andrew Bailey, the governor of the Bank of England has warned.

Speaking in an interview with CNBC, Mr Bailey said: “The volatility of this situation is another complication.”

He explained that the $10 change in the price of Brent crude on Thursday “illustrates just how unpredictable this thing is and how it’s moving around based on often, on what’s being said as much as what’s being done”.

Mr Bailey added:  “That makes our judgments much more difficult in that sense. We’re going to have to plot the best course we can through this with uncertainties about what’s going on in the Gulf, uncertainties about the level of energy prices, and then uncertainties about how it passes through into our into our economy.”

05:43pm

Gulf states have lost faith in Britain, says former Sea Lord

Gulf nations have lost faith in Britain as a military partner, Sir Nick Hine, the former Sea Lord, has warned.

Sir Nick, a retired vice admiral and the chief executive of Babcock Marine, said the withdrawal of the last UK minesweeper from Bahrain weeks before the start of the Iran war had strained relations with allies in the region.

Britain has had a constant minesweeping presence in the Gulf since the 1980s. Previously, four mine-hunters would have been deployed to defend the Strait of Hormuz.

During the conflict in the Middle East, Iran has seized control of the narrow waterway. It has reportedly laid around 20 sea mines.

05:23pm

ECB to consider raising interest rates in June

Policymakers at the European Central Bank are likely to raise interest rates at their next meeting in June unless energy prices ease and the conflict in the Middle East comes to an end, according to a report from Bloomberg.

If the Iran war continues there is only a slight chance that an increase in borrowing costs can be avoided, according to those involved in private talks at the central bank.

Christine Lagarde, President of the ECB, said earlier on Thursday that policymakers will consider increasing borrowing costs in June after after they voted to hold rates at 2pc.

It comes after data released earlier today showed that inflation in the eurozone rose to 3pc in the 12 months to April, up from 2.6pc a month earlier.

05:05pm

Markets end the day higher in London

Stocks in London rose after the Bank of England kept interest rates on hold and oil prices eased back from its four year high.

The FTSE 100 climbed 165.71 points, or 1.6pc, to end the session at 10,378.82.

The more domestically-focused FTSE 250 added 264.28 points, or 1.2pc to close at 22,465.15.

Germany’s stock market also rose after the ECB held borrowing costs steady.

The DAX gained 1.3pc on Thursday, while France’s CAC 40 rose 0.5pc.

04:43pm

Policymakers remain patient as conflict continues, says economist

Policymakers at the Bank of England have remained patient as the conflict in the Middle East continues and the impact of the energy price shock becomes more clear says Andrew Goodwin, from Oxford Economics.

Mr Goodwin explained that members of the Bank of England’s Monetary Policy Committee were balancing the impact of the inflation shock with the nation’s fragile labour market.

He added: “It wouldn’t take much to tip the balance towards rate hikes. Continued strength in energy prices or evidence the MPC has underestimated indirect impacts of higher energy prices could convince the majority to hike. “

04:25pm

‘The risks are clearly skewed towards near-term rate hikes’

The chances that the Bank of England will increase interest rates are rising as energy prices remain elevated, says Capital Economics.

Ruth Gregory, deputy UK economist at Capital Economics, said: “The risks are clearly skewed towards near-term rate hikes. The MPC wouldn’t have repeated the line that it “stands ready to act as necessary” if it didn’t think there was a good chance of rate hikes in the coming months.

“And while it struck a balanced tone by highlighting both the risks to higher inflation and to the weaker economy, the Governor chose not to use his media comments to push back against current market pricing, which imply there is a 50-50 chance of a June hike to 4.00pc.”

04:08pm

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03:47pm

Millions of households skip meals as food prices soar

Three million families are skipping meals to save money as living costs surge and unemployment rises.

One in every 10 households has missed a meal to save on grocery costs, according to a survey from consumer group Which?. It found that around 4.5 million families – or 15pc of households – have cut back on some foods.

It follows warnings that higher grocery bills are starting to weigh on shoppers, with 85pc of adults saying they are concerned about price rises within supermarkets.

Many said they were now buying budget items or seeking out promotions to avoid paying the full price where they could.

03:22pm

Bank of England has kept options open, says Goldman Sachs

Andrew Bailey has kept the Bank of England’s options open on interest rates despite setting out scenarios where rates would rise, according to Goldman Sachs.

The Governor described the decision to keep rates at 3.75pc as an “active hold”.

The Bank of England’s simulations showed rates rising to as high as 5.5pc in its worst case scenario, but Mr Bailey insisted this did not mean rises would happen.

He said: “There are paths through this where we don’t have to increase rates, and there are scenarios where we do.”

Sven Jari Stehn, chief Europe economist at Goldman Sachs, said Mr Bailey was “appearing to keep the Bank’s options open for the upcoming meetings”.

He said: “Most of the Bank’s policy simulations showed some increase in Bank Rate even in the two more benign scenarios, while showing a material rise in the most adverse scenario for energy prices.

“But Bailey noted in the press conference that the market had expected cuts at the time of the February meeting and argued that in the two scenarios with lower energy prices the change in the policy rules since then would ‘largely be accommodated by reversing out these assumed cuts without further increasing rates’.”

03:08pm

Rate cuts could happen in fourth quarter, says economist

The Bank of England could resume rate cuts in the fourth quarter of this year if the Strait of Hormuz reopens soon, an economist said.

Andrew Wishart of German private bank Berenberg said the bar was high for the Bank of England to raise interest rates.

He said: “Most Monetary Policy Committee (MPC) members doubt that a significant increase in Bank Rate will prove necessary amid a narrower energy price shock, softer aggregate demand and a weaker labour market than during the 2022 gas price surge.

“Very different economic conditions to those that prevailed in 2022 suggest that rate hikes are unnecessary, and that the Bank of England will eventually be able to resume cuts.

“Higher inflation near-term inflation will further erode household income, already squeezed by decelerating pay growth, a stagnant jobs market and a rising personal tax burden.

“Meanwhile, an increase in businesses costs that they cannot pass on could undermine the recent stabilisation of the jobs market.

“Fiscal consolidation and a weak labour market should ensure that the UK does not deal with this inflation shock worse than its peers.

“As our baseline scenario, we expect the Strait of Hormuz to reopen soon. If so, inflation can fall below 2pc in the second half of 2027 and the Bank of England can resume interest rate cuts in the fourth quarter.”

02:41pm

ECB debated raising rates, says Lagarde

The head of the European Central Bank (ECB) said policymakers considered raising interest rates in response to the war in Iran.

Christine Lagarde said the next six weeks would be crucial to make an informed decision on borrowing costs.

She said: “We debated the decision that we have unanimously taken today, but we also debated at length, and in depth, a decision to possibly hike.”

Ms Lagarde said she knew in which direction the ECB was heading on interest rates but said policymakers were not yet seeing inflation being driven up by second-round effects from the Middle East conflict.

She said: “We are seeing direct effects, granted, we’re seeing some indirect effects, but we’re certainly not seeing second-round effects, and that is something that we need to be very attentive to.”

Money markets indicate the ECB will raise twice this year, with a 90pc chance of a third increase to 2.75pc.Christine Lagarde said the ECB had debated whether to raise interest rates - AP Photo/Michael Probst

02:34pm

US stocks rise at opening bell

Wall Street’s main indexes opened higher as investors drew comfort from strong earnings, even as fears about an escalation in the Middle East conflict deepened.

The Dow Jones Industrial Average rose by 0.6pc to 49,135.91 despite oil prices soaring overnight as Donald Trump was reportedly briefed on options for military strikes on Iran.

The S&P 500 rose by 0.3pc to 7,158.83 and tech-heavy Nasdaq Composite gained 0.5pc to 24,800.20 as Big Tech earnings were largely strong.

Shares of ‌Google parent Alphabet were up ‌7.1pc following a record quarter for its cloud unit, while Amazon added 2.4pc after exceeding cloud sales expectations.

Stocks rose as the US economy accelerated at the start of 2026 after recovering from last year’s 43-day federal government shutdown.

US GDP grew by an annualised 2pc in January to March, compared to the final three months of 2025.

However, growth in consumer spending, which accounts for 70pc of US economic activity, slowed to 1.6pc in the first quarter from 1.9pc at the end of 2025.

02:10pm

FTSE 100 surges over hopes rate rises may be avoided

The FTSE 100 has climbed strongly after the Governor of the Bank of England signalled interest rates could be kept on hold this year.

The UK’s flagship stock index was up as much as 1.7pc to 10,385.45 after Andrew Bailey refused to commit to raising rates this year, even if the Iran war drags on.

The domestically focused FTSE 250 was up as much as 1.2pc after Mr Bailey said there are “paths where we don’t have to increase rates and paths where we do”.

Traders have scaled back bets on interest rate rises this year, pricing in two increases from 3.75pc to 4.25pc.

Money markets had priced three rises this morning after oil prices hit a four-year high to $126 but it has since fallen back to $114.

02:00pm

Lagarde warns of ‘upside’ risk on inflation

Christine Lagarde said the economic outlook is highly uncertainty after the European Central Bank held interest rates at 2pc.

The ECB president said the Iran war was weighing on economic activity and putting supply chains under pressure, while demand in the jobs market had cooled.

She warned inflation would be well above the ECB’s 2pc target in the short term said there was a risk that inflation would be on the “upside” of its forecasts.

“The war in the Middle East has caused significant volatility in global financial markets,” she said, adding that financial conditions were tighter than before the war.Christine Lagarde warned inflation would be ‘well above’ the ECB’s 2pc target in the near term - Kirill KUDRYAVTSEV / AFP via Getty Images

01:55pm

Bank of England ‘buying time’ on rates

The Bank of England has bought itself time on the Iran war but has become more concerned about the risks to inflation, Deutsche Bank said.

Chief UK economist Sanjay Raja said policymakers had signalled they would put more weight on surveys to guide on the risks to the inflation outlook, rather than waiting for official data.

He said: “The April decision underscores the MPC’s nervousness about second-round effects – particularly with energy prices proving more volatile than assumed previously.

“Big picture, the MPC has bought itself time today. The MPC is preaching patience – but at the same time, the Bank has signalled that its patience may be wearing thin.”

He said policymakers had kicked the can down the road until at least July.

He added: “The longer the energy shock lasts, the higher the likelihood of rate hikes. And the more the Bank staff’s short-term projections are tested, the harder it will be for some on the committee to remain on the sidelines.

“Given elevated geopolitical uncertainty, risks of multiple rate hikes can no longer be discounted.”

01:47pm

Higher chance of rate rises, say economists

The chances of near-term increases in interest rates are rising after the Bank of England’s latest report, according to economists.

Ruth Gregory of Capital Economics said two of the three scenarios set out by the Monetary Policy Committee (MPC) delivered a “much more concerning message about the inflation outlook”.

She said: “The MPC wouldn’t have kept the line that it ‘stands ready to act as necessary’ if it didn’t think there was a good chance of rate hikes in the coming months.

“And while it suggested the weaker economy and labour market and tighter financial conditions will help to reduce inflation over time, some MPC members were clearly concerned about the risk of material second-round effects from inflation, requiring policy ‘to lean against this’.”

She added: “If energy prices ease back as we anticipate in our baseline scenario, we still expect the Bank to leave rates unchanged at 3.75pc this year. But the most recent rise in oil prices nudges us closer to the outcomes in our adverse scenario in which we think the Bank could hike rates to 4.5pc.”

Rob Wood of Pantheon Macroeconomics said: “Given oil prices in recent days and an MPC that we see as more willing to hike, we shift our call to two Bank Rate increases in 2026 and two cuts in 2027, with a potential third cut in 2028.”

01:35pm

Labour ‘relieved to blame woes on Iran war’

The conflict in the Middle East has become a “convenient excuse” for the Government as Britain’s fragile economy grapples with an energy shock, according to Telegraph readers.

Here are some views from our comments section below and you can join the debate here.

01:26pm

Eurozone interest rates held at 2pc

The European Central Bank left interest rates unchanged but signalled it has ​rising concerns over soaring ‌inflation.

Inflation jumped to 3pc this month, well above the bank’s 2pc target.

A further rise is expected as the Iran war has pushed oil prices to a four-year high.

The ECB said: “The upside risks to inflation and the downside risks to growth have intensified.

“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.”

Financial markets now suggest there will be rate rises in June and July, followed by at least one more move in the autumn.

01:17pm

Bailey: There are paths where we don’t have to increase rates

Andrew Bailey suggested there was a chance interest rates could remain unchanged this year if the Iran conflict is resolved.

The Governor said cutting rates was “not realistic” after the outbreak of the war, despite it having been his “central expectation” back in February.

He said at the last meeting in March, the Bank had taken rate cuts “off the table”.

However, in his scenarios for what happens to the UK economy this year, he said there are “paths where we don’t have to increase rates and paths where we do”.Andrew Bailey held a press conference at the Bank of England - AP Photo/Kirsty Wigglesworth

01:09pm

Reeves has left us vulnerable to energy crisis, say Tories

After interest rates were held at 3.75pc, Conservative shadow chancellor Sir Mel Stride said: “Rachel Reeves has weakened our economy and left us vulnerable in the run up to the latest energy crisis.

“The conflict in the Middle East is pushing up prices – but the UK already had the highest inflation in the G7 thanks to Labour’s choices.

“Tax hikes, reckless spending and disastrous energy policies have paved the way for high inflation and interest rates staying higher for longer.

“We need a different approach: cutting the benefits bill, lowering taxes and drilling in the North Sea. We need to Get Britain Working Again.”

01:05pm

Borrowing costs fall during Bailey press conference

The cost of government borrowing has fallen as Andrew Bailey has refused to commit to interest rate rises.

The yield on two-year gilts – a proxy for short-term government borrowing costs – has dropped by 0.1 percentage points to 4.45pc during the Governor’s press conference.

Mr Bailey refused to set out how far interest rates would rise if it felt the need to make a “forceful” response to the incoming inflation shock.

Deputy governor Clare Lombardelli said the Bank had not placed probabilities on any of its three scenarios for how the Iran war shock plays out.

12:57pm

Waiting for data would be a mistake, says Bailey

Andrew Bailey said it would be a mistake if the Bank of England waited for data on how businesses were passing on costs before raising interest rates.

The Governor was asked by our economics editor Szu Ping Chan when he would consider the most severe scenario to have begun playing out.

He said that if that type of “very difficult” scenario emerged, it would be “important we respond quickly to it”.

He added the challenge for the Bank was judging the scale of the knock on effects from the inflation shock, such as businesses passing on price rises or pushing up wages.

He said data on these things “emerge much more slowly”, adding it “would be mistake to wait” the for second round effects to emerge.

12:52pm

Worst case scenario sees oil above $100 through to end of year

Andrew Bailey said the situation was so volatile, adding that the Bank’s worst-case scenario for the economy was a “very persistent scenario”.

Under that scenario, oil prices would remain above $100 through to the end of next year.

He added that if the press conference had been held at 9am this morning, Brent crude prices were over $120 a barrel, but walking into the room it was $10 lower.

12:47pm

Good case for holding rates, says Bailey

Andrew Bailey said there was a “good case for holding rates now” given markets were still trying to work out the scale of the Iran war shock.

He pointed out that the range on oil prices today was more than $10 a barrel.

12:44pm

Rates must be ‘materially higher’ if inflation rises to 6pc

Andrew Bailey said it would be a “difficult judgment call” on when to raise interest rates as the Iran war rages on.

The Bank of England has set out three scenarios on inflation, with the worst of which seeing the pace of price rises soar above 6pc.

He said interest rates would need to be “materially higher” under the worst case scenario.

12:39pm

Reopening Hormuz would lower impact of war, says Bailey

Andrew Bailey said reopening the Strait of Hormuz would reduce the impact of the inflation shock on the UK economy.

The Governor said the Iran war would have a worse impact the longer the Iran war goes on.

He said the largest knock on effects of the war would be seen in food prices, but added the scale of the second-round inflation effects was “highly uncertain”.

This added to the case for “looking through” the inflation shock, he added.

12:35pm

Bailey aims to avoid inflation becoming embedded

Andrew Bailey has begun his press conference after announcing interest rates would be held at 3.75pc.

The Governor said the job of the Bank was to stop the impending inflation shock becoming embedded.

Inflation will rise to a little over 3.5pc by the end of the year as a “direct consequence” of the conflict in the Middle East, he said.

12:31pm

Living standards face blow from Iran war

Living standards were already falling at the end of last year and are expected to take a further blow from the war in Iran, according to the Bank of England.

Prices rose faster than wages in late 2025, meaning households’ real post-tax incomes were in decline.

Now families have already been hit by higher fuel prices and can expect to see a rise in the household energy price cap – from £1,641 to around £1,900 per year – in July.

12:27pm

Traders reduce bets on interest rate rises

Traders scaled back their bets on interest rate rises this year after the Bank of England kept borrowing costs on hold and set out its inflation scenarios.

Money markets indicate there will be two increases in rates this year by the Monetary Policy Committee (MPC), with a 68pc chance of a third.

This morning, three full rate rises were priced in by traders after the price of oil surged to a four year high above $126 a barrel.

Yael Selfin, chief economist at KPMG UK, said the Bank of England had adopted “a cautious tone”.

She said: “While the Bank did not push back against market expectations, it struck a balanced tone, highlighting the risks of higher inflation and a weakening economy.

“This will allow the MPC to retain flexibility in its policy response over the coming meetings amidst a highly uncertain backdrop.

“Data since the last meeting has been limited, but a raft of survey evidence suggests businesses are already feeling the impact of the energy shock and have begun to raise prices. The Bank will have to balance the growing upside risks to inflation against a weakening labour market and softer growth, both of which were downgraded in today’s updated projections.

“Recent tightening in financial conditions, gives the Bank more time to assess domestic inflation dynamics alongside developments in the Middle East. If energy supplies remain disrupted, the hawks will have a strong case to argue for a rate increase at the June meeting. Beyond that, it will be difficult to build consensus for further rate rises given the growing downside risks to the economy.”

12:24pm

Pound rises as Bank lays ground for higher rates

The value of the pound jumped after the Bank of England said its policymakers “stand ready” to act on inevitable rises in inflation this year.

Sterling was up 0.4pc against the dollar at $1.353 after the Bank set out a range of scenarios on inflation this year, all of which lead to higher interest rates.

The pound was little changed against the euro, with the European Central Bank poised to announce its own interest rate decision within an hour.

12:17pm

Food prices forecast to rise by up to 7pc

Food prices are set to rise by between 6pc and 7pc later this year, the Bank of England said, amid higher energy costs and an increase in the price of fertiliser.

Officials expect food price inflation to hit 4.6pc by September, with industry contacts warning the Bank that pressures will only increase in the following months.

It represents a major blow to household finances, as surveys indicate families have already traded down to buy cheaper brands in supermarkets, as well as cutting back on more expensive products.

A survey from consumer group Which? indicates as many as 3m people are already skipping meals to keep costs down.

12:14pm

Prepare for higher interest rates, Bank of England warns

The Bank of England has warned that the Iran war risks pushing inflation above 6pc, as it told households and business to prepare for higher interest rates.

Policymakers voted 8-1 to keep interest rates on hold at 3.75pc but warned that a persistent energy price shock would warrant a “forceful” response with multiple rate hikes to control inflation.

Bank Governor Andrew Bailey warned that further price rises were inevitable, even if the Iranian war is resolved quickly.

Policymakers said living standards were already falling, dealing a blow to Sir Keir Starmer’s pledge to raise them faster than any other G7 economy.

The Bank warned that prices were likely to keep rising for the rest of the year while unemployment is on course to hit two million for the first time in more than a decade.

Officials said the Iranian war had left the average homeowner facing an £80-a-month increase in mortgage payments over the next three years, while also predicting that typical energy bills were likely to rise 16pc to £1,900 this summer.

Shoppers also face higher prices in the supermarkets, with food inflation predicted to hit 7pc by the end of the year because of higher fertiliser costs. Some experts warn that food prices could see double-digit inflation by December.

The latest forecasts by the Bank’s Monetary Policy Committee (MPC) k showed that even an early resolution to the Iran conflict that saw oil prices fall back below $80 a barrel by the start of next year would see inflation peak at 3.6pc and unemployment rise above two million by the start of 2027. Growth was also likely to be materially weaker at 0.8pc this year and 1pc in 2027.

However, it warned that “continued substantial disruption to Middle Eastern energy supplies” that saw oil prices remain above $100 a barrel until the start of 2028 would push inflation to 6.2pc, while unemployment would peak at 2.1 million by the end of next year.

12:10pm

Bank’s chief economist votes for rate rise to 4pc

Just one member of the nine-strong Monetary Policy Committee (MPC) voted to raise rates.

Huw Pill, the Bank’s chief economist, backed an increase in the base rate from 3.75pc to 4pc.

He fears that inflation was already too high before the war – at 3pc, compared to the Bank’s 2pc target – and that the oil price shock risks triggering a fresh wave of price rises.

That is particularly because the shock is felt rapidly by families in the cost of the goods that they buy most frequently, raising their expectations of inflation in the wider economy and potentially leading to demands for bigger pay rises - which in turn stoke more inflation.

“Structural change in price and wage-setting, and the impact of inflation expectations of greater attentiveness to, and salience of, energy and food prices” are big risks, he says.

“As someone already concerned about a stalling of the underlying disinflation process even before the latest energy price shock, a prompt but modest hike in bank rate will help mitigate upside risks to price stability.”

12:06pm

Reeves pledges to avoid past mistakes on inflation

Rachel Reeves insisted Britain had been in a strong position at the start of the shock caused by the Iran war, as the Bank of England held interest rates at 3.75pc.

The Chancellor said: “The war in the Middle East is not our war, but it is one we have to respond to.

“Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we’ve seen in the past that resulted in higher inflation and higher interest rates.

“We entered this conflict in a stronger position because of the choices this government took to build economic stability, and we are going further to take back our energy security, backing British industry and protecting households, to build a Britain that is stronger, more resilient, and prepared for the future.”

12:03pm

Iran war pushing up inflation, says Bailey

The Governor of the Bank of England said interest rates are in a “reasonable” place despite the Iran war.

He said: “The war in the Middle East is causing inflation to rise again this year.  We’ve held Bank Rate unchanged at 3.75pc.

“We think this is a reasonable place given the situation of the economy and the unpredictability of events in the Middle East. We’ll continue to monitor the situation and its impact on the UK economy very closely.

“Whatever happens, our job is to make sure that inflation gets back to the 2% target after the initial impact of the war on energy prices has passed.”

12:00pm

Interest rates held at 3.75pc

The Bank of England has kept interest rates on hold despite the Iran war driving up inflation.

Policymakers voted to maintain rates at 3.75pc for the third consecutive meeting on Thursday.

Borrowing costs have been maintained even as the UK faces growing inflationary pressures. Petrol prices have jumped more than 24p since the start of the Iran war after oil and gas supplies were cut off through the Strait of Hormuz.

Official figures showed this pushed inflation up to 3.3pc last month, well above the Bank of England’s 2pc target.

Oil prices surged to a four-year high, rising above $126 a barrel, on Thursday morning over fears the Iran war will drag on. Prices have since dropped back to around $116.

Traders on money markets expect policymakers to raise rates at least three times to 4.5pc later this year to bring inflation under control.

11:49am

Drivers face ‘likely setback’ after oil price spike

Drivers are likely to face another blow at the pump after the spike in oil prices to fresh four-year highs this year, the RAC has said.

Petrol prices remain more than 24p higher since the start of the war at 156.98p, the latest data from the motoring group showed, with diesel up over 46p to 188.53p.

Head of policy Simon Williams said: “The sudden spike in the price of crude oil due to the latest tensions in the Middle East is likely to be a setback for drivers.

“While the price of unleaded at the pumps has fallen by more than a penny since peaking on 15 April at 158.31p, our analysis of wholesale costs shows petrol is now more expensive for retailers to buy than at any time since the war began.

“However diesel, which has come down by 3p a litre, is currently well below its highest wholesale price since the start of the conflict, so should fall further.

“The switch round in wholesale cost trends is partly due to the time of year as the market for petrol tends to increase in the spring as people in the US begin to drive more, whereas the price of diesel often reduces as Western Europe’s use of heating oil, which is made from the same part of the barrel, lessens as the temperature warms up.”

11:27am

Raising interest rates ‘will crash the economy’

It makes no sense to raise interest rates when oil prices will already restrict the economy, Telegraph readers have warned as the Bank of England prepares to announce its next decision on monetary policy.

Here is a selection of views from our comments section below. You can join the debate here on the announcement, where policymakers are expected to hold rates at 3.75pc.

11:10am

Oil prices dip after hitting four-year highs

The price of oil has fallen back after hitting its highest level since 2022.

Brent crude, the international benchmark, was down 1.4pc to just over $116 a barrel, having surpassed $126 overnight.

The FTSE 100 was up 1pc and the Dax in Germany rose 0.2pc after the move in prices, although there appeared to be no major catalyst for the change.

10:43am

Stagflation fears cast long shadow over Bank of England

The Bank of England will reveal how policymakers have tried to assess the risks of a downturn to both growth and inflation, known to economists as stagflation.

Suren Thiru, chief economist at ICAEW, said he thinks rate setters will be hoping they can keep borrowing costs on hold through the inflation shock caused by the Iran war in an effort to limit damage to growth.

He said: “While the economic aftereffects of the Iran war have turned the Monetary Policy Committee notably more hawkish, a policy hold at 3.75pc at midday looks locked in given still heightened uncertainty over the ramifications of the conflict.

“Stagflation fears will cast a long shadow over this policy meeting with elevated concerns over inflation possibly pushing at least one of the more hawkish rate-setters to break ranks and vote to raise rates.

“With the Bank’s updated forecasts set to further fuel stagflation fears by projecting notably higher inflation and weaker economic growth, setting policy is likely to become more hazardous for committee members, especially given rising global headwinds.

“The squeeze on demand in the economy from weakening wage growth and a slowing economy should give policymakers sufficient wriggle room to look keep rates on hold through this period of elevated inflation.”Activists from Positive Money urged the Bank of England not to raise interest rates today - Vuk Valcic/ZUMA Press Wire/Shutterstock

10:24am

Eurozone growth worse than expected

The eurozone economy grew less than expected in the first three months of the year, official figures show.

Gross domestic product in the bloc dropped to 0.1pc in the first quarter, down from 0.2pc at the end of 2025. It was lower than forecasts of 0.2pc.

Jack Allen-Reynolds of Capital Economics said: “The slowdown in eurozone GDP growth in the first quarter shows that the economy lost a little pace even before the Iran war, and the business surveys point to stagnation at the start of the second quarter.”

Meanwhile, inflation in the eurozone rose from 2.6pc in March to 3pc in April.

Mr Allen-Reynolds warned that if oil prices remain around $120 per barrel, the direct effect on fuel prices would add another 0.5 percentage points to inflation in May.

10:07am

Drivers hit with £2bn fuel bill since start of Iran war

The Iran oil crisis has cost UK drivers £2bn through higher fuel prices in just over a month, according to new analysis.

Motorists have paud an extra half a billion pounds for petrol and £1.5bn for diesel since the start of the conflict, the RAC Foundation said.

It added that the Treasury has been given a £336m boost as a result of higher VAT receipts on fuel.

Steve Gooding, director of the RAC Foundation, said: “This is another unwelcome milestone for millions of motorists as the financial pain caused by the war in the Persian Gulf continues to mount up.

“As ministers themselves have warned, the economic effects of the conflict could last for months even after it has ended.

“The owners of diesel vehicles have borne the largest brunt of the pump price hikes, many of whom will be commercial users with little choice but to pass on their costs to their customers.

“Whether we are drivers or not, we all end up feeling the pinch from sky-high forecourt fuel prices.”Fuel prices have rocketed since the start of the Iran war - REUTERS/Toby Melville

09:44am

FTSE 100 outperforms Europe as oil surges

The FTSE 100 was higher despite a sea of red sweeping European stock markets over surging oil prices.

The UK’s flagship stock index was up 0.5pc, with FTSE 250 up 0.2pc, with mining stocks boosted by rising gold prices. Energy stocks were up 0.6pc.

By contrast, major markets across Europe were lower as rising oil prices threaten growth and risk pushing up higher inflation.

Investors have shifted into safe haven assets like gold and the dollar after Donald Trump was reportedly briefed on fresh military options to strike Iran.

The FTSE 100 rose after sinking by 1.2pc on Wednesday.

Neil Birrell, chief investment officer at Premier Miton, said: “This move in the oil price might be the catalyst to see sentiment and longer-term positioning changing.

“The macro impact and the potential damage to corporate profits will come back into stark focus.

“So far, economies and equities have proven to be remarkably resilient. The question is; can that continue if the oil price stays at this level or higher?”

09:31am

German economy grows despite Iran shock

Germany’s economy ‌grew more than expected in the first quarter despite the geopolitical shock of the war in Iran.

Household consumption and government spending helped gross domestic product ‌(GDP) in Europe’s largest economy grow ‌by ⁠0.3pc in January to March.

Analysts had forecast growth of just 0.2pc.

09:18am

Bank of England’s new forecasts already out of date

While the Bank of England will sound the alarm on the impact of the Iran war on growth and prices, many of its latest forecasts are already out of date.

The ink on those projections dried well before reports emerged that Donald Trump was preparing to escalate the conflict with further military action.

They were based on a snapshot of energy markets over 15 working days in early April, when oil prices hovered around $100 a barrel.

With Brent crude now firmly above that level, attention will turn to the Bank’s scenarios for a world in which higher oil prices persist for longer.

In short, the outlook is likely to be either bad — or very bad.

09:05am

Interest rates expected to hit 4.5pc

Interest rates will rise to 4.5pc by the end of this year, according to money markets, after the Iran war sent oil prices surging.

Traders are now betting that the Bank of England will raise borrowing costs three times this year in a blow to mortgage borrowers.

Rates had been expected to jump twice before the latest surge in oil prices to a four-year high.

Policymakers are expected to leave rates unchanged at 3.75pc today and will update their forecasts for inflation.

Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, predicted a unanimous hold vote but suggested recent data could drive future concerns over elevated price rises.

He said: “If surveys for May repeat the same pattern, and crucially the ‘dirty’ Middle East ceasefire continues with oil flows disrupted, we think the MPC will be bumped into a hike in June, or perhaps July.

“We expect rate setters to hike once this year, in June, before cutting twice in 2027 to leave interest rates at 3.5pc.”

08:40am

UK borrowing costs edge higher ahead of rate decision

The cost of government borrowing has edged higher a day after hitting their highest level since 1998.

Gilt yields – the return the Treasury pays to buyers of its bonds, or debt – have risen ahead of the Bank of England’s next decision on interest rates.

The 30-year yield, which hit a 27-year high on Wednesday, inched up to 5.73pc in early trading, while the benchmark 10-year gilt yield rose to 5.08pc.

UK borrowing costs have come under pressure from the inflation shock caused by the Iran war and concerns Sir Keir Starmer will be replaced by a Left-leaning Labour leader.

It is feared a bad result in the May local elections will see the Prime Minister ousted in favour of a candidate who wants to increase borrowing and spending.

Luke Hickmore, investment director at Aberdeen Investments, said: “Bond markets are not casting a vote in May, but they are actively pricing what the outcome might mean.

“Political uncertainty translates into higher term premia, higher yields and ultimately a higher cost of borrowing for the UK.

“For fixed income investors, the conclusion is clear – politics is not background noise. In today’s gilt market, it is a fundamental part of the investment signal.”

08:24am

European stocks plunge as Iran war hits growth

European shares tumbled as official data showed the Iran war has hit growth.

The Cac 40 in Paris plunged 1.2pc as official figures showed growth flatlined in the French economy in the first three months of the year.

Spain’s Ibex 35 plummeted around 6pc as growth fell back to 0.6pc, down from 0.8pc.

The continent-wide Stoxx 600 was down 0.6pc and on track for a second weekly decline as Donald Trump was expected to receive a briefing on fresh strikes on Iran, which has sent oil prices surging.

Investors were also braced for decisions from the European Central Bank and the Bank of England.

Frankfurt’s Dax sank by 0.9pc under pressure from higher oil prices, which jumped as much as 7.1pc overnight to a four-year high.

08:18am

French economy flatlines over Iran war

France’s economy recorded zero growth in the first quarter of this year in one of the first signs of how the Middle East conflict is affecting Europe.

Gross domestic product (GDP) flatlined due to “sluggish” domestic demand and a “strongly” negative contribution from foreign trade, the national statistics agency Insee said.

As little as two weeks ago, the French central bank estimated that the country’s economy could grow by as much as 0.3pc the first three months of the year, while Insee cut its forecast from 0.3pc to 0.2pc growth at the end of March.

France’s economy had expanded by 0.2pc at the end of last year.

Meanwhile, Spain’s economy withstood the turmoil unleashed by the Middle East war to post 0.6pc growth in the first quarter, in line with expectations, official data showed.

Economy minister Carlos Cuerpo said: “The Spanish economy is maintaining its growth rate in a start to the year marked by the war in Iran.”

08:06am

UK stocks edge lower ahead of rate decision

Stock markets in London inched downwards at the open ahead of the Bank of England’s next interest rate decision.

The FTSE 100 was little changed at 10,209.81 as traders wait to see how policymakers have updated their forecasts for inflation this year.

The domestically-focused FTSE 250 fell 0.2pc to 22,167.23.

08:03am

Rolls-Royce expects to ‘fully mitigate’ Iran war turmoil

Rolls-Royce said it would be able to fully mitigate disruption caused by the war in the Middle East.

The ⁠British engineering group has stuck to guidance for profit to ​rise at ‌least 16pc this year despite turmoil from the Iran war.

It provides engines that power Airbus A350 and Boeing 787 widebody jets, meaning its airline customers have been affected by the severe disruption to global air ‌travel ‌during the Iran war.

Air travel has since recovered somewhat, although ⁠airlines, which pay Rolls for the hours they fly using its engines, continue to face higher fuel prices as a result of ​the conflict.

Rolls said in a ‌trading update that it had seen a recovery in engine flying hours from Middle Eastern airlines, with ‌some engines ​now back ⁠at pre-conflict levels, and there had been growth in other regions as carriers ⁠reallocate capacity.

Tufan Erginbilgic, the chief executive, said: “We expect ​to fully mitigate the current financial impact of the disruption to ​our business.”

Rolls-Royce, whose ​power systems also run ​data centres and which has ⁠nuclear ⁠power and defence units, is guiding to operating profit of between £4bn and £4.2bn this year.Rolls-Royce makes jet engines for airlines - Hollie Adams/Bloomberg

07:48am

Borrowing costs rise over surging oil prices

Global bonds have taken a kicking after the oil spike and the latest interest rate decision by the US Federal Reserve.

The 10-year US Treasury yield – a proxy for government borrowing costs – jumped overnight to 4.43pc, which was the highest since late ‌March.

The yield on 10-year Japanese government bonds rose from 2.46pc ​to 2.51pc, which was the highest since June 1997. Australia’s 10-year government ​bond yields jumped from 5.01pc to to 5.07pc.

It came as the Fed kept rates on hold as expected, but four policymakers dissented from that view, which was the most since 1992. Three said they did not agree with the Fed’s bias towards lower rates.

Meanwhile, the rise in oil prices has raised concerns that the world economy faces a hit to growth and rising inflation, which is bad for bonds.

Jim Reid, an analyst at Deutsche Bank, said the surge in oil prices had “fed growing fears about an extended stagflationary shock”.

The UK debt market opens after 8am.

07:24am

Oil prices surge 7pc as Trump briefed on Iran strikes

Oil surged past $126 a barrel as stalled US-Iran talks raised doubts over the reopening of the Strait of Hormuz and a permanent end to the Iran war.

Brent crude rose as much as 7.1pc to $126.41, up from around $70 before the start of the war in the Middle East.

The jump followed a report the Donald Trump would be briefed on potential fresh military strikes after rejecting Iran’s proposal to end the war, which he though was not offered in good faith.

Admiral Brad Cooper, commander of US Central Command (CENTCOM), would brief the US president on potential military action, according to Axios.

Warren Patterson, an analyst at ING, said: “The breakdown of talks between the US and Iran, along with President Trump reportedly rejecting Iran’s proposal for a reopening of the Strait of Hormuz, has the market losing hope for any quick resumption in oil flows.”

07:13am

Bank of England expected to keep rates at 3.75pc

The Bank of England is poised to keep interest rates on hold as policymakers opt for a cautious approach to the conflict in the Middle East.

Most economists are expecting the Bank’s nine-member Monetary Policy Committee (MPC) to keep rates at 3.75pc when their next decision is announced at noon.

The MPC will also publish its first full monetary policy report and set of economic forecasts since the conflict between US-Israeli and Iranian forces began in late February.

Last week, a raft of economic data showed the conflict has helped drive inflation higher.

Data published by the Office for National Statistics showed inflation lifted to 3.3pc in March, up from 3pc in February, on the back of accelerating fuel prices.

06:51am

Good morning

Thanks for joining me. The Bank of England is expected to leave interest rates on hold later today despite oil prices surging to their highest level since the start of the Iran war. Here is what you need to know.

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What happened overnight

Oil prices soared to a fresh four-year high after Donald Trump warned the US blockade of Iranian ports could last months and a report said he would be briefed on potential fresh military strikes.

While Tehran submitted a fresh proposal this week to reopen the crucial Strait of Hormuz, the US president reportedly did not believe it was negotiating in good faith.

He had told national security officials to prepare for a long blockade to compel the Islamic republic to give up its nuclear programme, The Wall Street Journal said.

The prospect of the strait - through which a fifth of world oil and gas passes - being closed for months more sent crude surging to the highest level since 2022, after Russia invaded Ukraine.

Brent crude surged 7.1pc to more than $126 per barrel, while West Texas Intermediate climbed 3.4pc to more than $110.

Stock markets fell, with Tokyo, Hong Kong, Sydney, Seoul, Taipei, Mumbai, Bangkok, Manila and Jakarta all down. There were gains in Singapore and Wellington, while Shanghai was flat.

The dollar, seen as a safe haven during the crisis, rose against its peers.

Stocks on Wall Street struggled for direction on Wednesday as traders awaited a raft of earnings reports after the bell. The S&P 500 and the Nasdaq ended the day largely flat, while the Dow Jones Industrial Average shed 0.6pc.

However, in after hours trading Meta shares declined 7pc as investors were left disappointed by Mark Zuckerberg’s plans to boost AI spending. Amazon, Microsoft, and Alphabet all reported strong growth in their cloud computing divisions.

Markets were largely muted after the Federal Reserve voted to hold rates at 3.75pc over worries about rising inflation.

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