The Bank of England holds its key interest rate at 3.75% as conflict-driven energy price hikes threaten to push UK inflation higher.

LONDON: The Bank of England has paused its interest rate-cutting cycle, holding its benchmark rate at 3.75%.

Britain’s central bank cited a significant new inflationary shock from soaring energy and commodity prices driven by conflict in West Asia.

The Monetary Policy Committee said prior disinflation in domestic prices and wages had been ongoing before the conflict.

It now expects Consumer Prices Index inflation to be higher in the near term as a result of the new economic shock.

Based on energy prices from March 16, CPI inflation is expected to be close to 3.5% in March.

This is almost 0.5 percentage points higher than forecast in the bank’s February report.

The committee warned that even a short-lived conflict could delay the restoration of normal energy production levels.

It also noted the risk of lingering instability keeping energy prices elevated for some time.

A more protracted conflict could cause broader supply chain disruptions, pushing inflation up further.

“The outbreak of conflict has re-framed the inflation landscape, both globally and in the UK,” said Anna Leach, chief economist at the Institute of Directors.

She noted the significant rise in energy prices and market volatility led to a unanimous vote for a rate hold.

“Only a few weeks ago, a rate cut in March looked like a done deal,” said Alpesh Paleja of the Confederation of British Industry.

He said higher global energy prices could delay the return of CPI to the 2% target by almost a year.

European gas and oil prices rose sharply following the attacks.

The Dutch TTF gas benchmark surged more than 30% to 70.7 euros per megawatt-hour at the open.

Brent crude oil rose to above USD 116 per barrel in early trading.

“Today’s decision to hold rates at 3.75% was widely expected,” said David Bharier of the British Chambers of Commerce.

The BCC anticipates no further rate cuts soon, which is concerning for businesses seeking to borrow for investment.

The MPC remains alert to increased risks of domestic inflationary pressures through second-round effects on wages and prices.

It stated this risk will be greater the longer higher energy prices persist.

Britain’s economy showed weakness even before the conflict, with zero GDP growth in January.

The unemployment rate hit 5.2% between November and January, the highest in around five years.

The MPC said it will continue to monitor the situation in West Asia and its impact on global energy supply and prices.

It pledged to act as necessary to ensure CPI inflation remains on track to meet the 2% target in the medium term.

 The Sun Malaysia