Bank of England Governor Andrew Bailey said that a prolonged conflict between Iran, Israel, and the U.S. could trigger a significant energy shock [1, 2].
This warning signals a potential reversal in the fight against inflation, as rising energy costs could force the central bank to hike borrowing costs for millions of households already facing financial pressure.
Speaking during a press briefing in London and at an International Monetary Fund meeting on April 25, 2024, Bailey said the global economy faces risks from disrupted energy markets [1, 2, 4]. He said that hostilities in the Middle East could drive up oil and gas prices, which would subsequently increase the cost of living within the United Kingdom [1, 2].
"We are heading for a very big energy shock that will push up prices for households," Bailey said [1].
While the Bank of England has held the base rate at 3.75% [4], Bailey outlined a worst-case scenario if energy disruptions persist. He said that in such a scenario, inflation could rise to approximately 6.2% [2]. This spike in prices would likely necessitate an increase in interest rates, which could climb as high as 5.25% [2].
Bailey said the current geopolitical situation is "very, very difficult" and that the bank is preparing a range of options to handle different outcomes [3]. The central bank is monitoring how energy price volatility feeds into the broader economy, a process that typically increases the cost of transport and heating for consumers [1, 2].
"If the disruption to energy prices lasts for a prolonged period, inflation could rise to around 6.2% and interest rates might need to go as high as 5.25% in a worst-case scenario," Bailey said [2].
“"We are heading for a very big energy shock that will push up prices for households."”
The Bank of England is signaling that its monetary policy is highly vulnerable to external geopolitical shocks. By explicitly linking Middle East stability to domestic interest rates, the bank is managing public expectations for a potential period of higher borrowing costs, effectively warning that the path toward lower inflation is not guaranteed if global energy supplies are compromised.
