Bank of England Warns Iran War Could Push UK Inflation Above 4%

Bank of England Governor Andrew Bailey told MPs that the conflict involving Iran is keeping energy costs high and raising the risk that UK inflation will move higher next year. Bailey said volatility in energy markets was feeding through to financial markets and that the conflict could push prices up further if it continues. The Bank highlighted how recent disruptions — including a reported blockade of the Strait of Hormuz and attacks by an Iran-aligned militia that forced some Saudi refineries to halt operations — have driven Brent crude toward $100 a barrel. In its summer analysis, Bank officials warned that if oil remained around $100 a barrel for several months, inflation could climb above 4%. Markets have already reacted: short-term UK bond yields have risen and traders appear to be pricing in a premium to cover the risk of prolonged trade disruption, a move Bailey said is consistent with an upside inflation risk. He noted that yield pricing implies the possibility of around three interest rate hikes over the next 12 months, though he emphasized there was "no secret plan" to raise rates and that the Monetary Policy Committee will act based on incoming data. Bank economists say a sustained inflation rise would depend on second-round effects, where higher prices lead to stronger wage growth and vice versa. Bailey also flagged weakness in the labour market, noting youth unemployment at roughly 16%, while warning that higher borrowing costs — the UK is now paying near-record levels on new debt — would reflect market concerns about persistent inflation and supply disruptions in energy markets.