Bank of England Set to Hold Rates as UK Inflation Hits Five-Month High

The Bank of England is widely expected to leave interest rates unchanged on Thursday, even after official data showed UK inflation climbing to a five-month high as the economic fallout from the Iran war continues to push up fuel prices.

Economists anticipate that a majority of the nine-member Monetary Policy Committee will vote to hold the bank's main rate at 3.75% for a sixth consecutive meeting. Policymakers are seen as wanting more evidence that elevated inflation is feeding through into underlying prices and wages before considering a change in stance.

Figures released on Wednesday showed the UK consumer prices index rising to 3.1% in August, up from 2.9% the previous month. The increase, which takes inflation further above the Bank's 2% target, was driven largely by higher pump prices and airfares.

David Rees, head of global economics at Schroders, is among the economists who expect rates to be held, pointing to a relatively soft economic backdrop in areas such as wages and the labour market.

"That should limit the extent to which imported price pressures become embedded in domestic wages and prices," he said.

Many economists expect inflation to rise further in the coming months, with households facing another increase in domestic energy bills from October. Financial markets now broadly expect a rate increase at one of the next two meetings, in November or December.

UK interest rates had been on a downward path from a 15-year high of 5.25% until the US and Israel attacked Iran in late February. The conflict triggered sharp rises in oil and gas prices, partly because the Strait of Hormuz has remained largely closed to traffic since then.

Beyond its effect on personal loans and mortgages, the shift in rate expectations poses a growing challenge for the British government, as debt servicing absorbs a larger share of public spending.