The Bank of England could be forced to abandon its economic forecasts and raise interest rates before the end of the year if oil prices climb back above $100 a barrel, City economists have warned – as a bleak new report predicts Britain faces a prolonged period of weak growth and a surge in unemployment.
A barrel of Brent crude jumped above $100 (£75) on Thursday before falling back to $96 on Friday, well above the $71 recorded earlier this month. The spike followed the breakdown of a fragile ceasefire between the US and Iran, with fighting reignited last week. Gas prices have also soared ahead of the crucial period when most European countries refill their storage for winter heating.
“Economists warn Bank of England may hike rates if oil tops $100, as ITEM Club forecasts weak growth and unemployment surge.”
The Bank of England's nine-member monetary policy committee is expected to vote on Thursday to hold interest rates at 3.75%, by a margin of seven to two – echoing their last meeting in June when two officials voted to increase rates to head off rising inflation. But the renewed turmoil in the Middle East has cast a shadow over the outlook.
Sanjay Raja, chief UK economist at Deutsche Bank, said the calculation could change if the intensity of airstrikes is maintained and sea channels for tankers remain blocked. "We see upside risks to the interest rate outlook in the near term, with much dependent on the duration of the unfolding energy shock," he said. "A second energy wave will likely amplify uncertainty around the inflation path and the risk of second-round effects."
George Buckley, chief UK and euro area economist at Nomura, said financial markets were giving a clear signal that higher oil prices would translate into higher interest rates. "At $90 they would see …" (the article cuts off, but the implication is that rates would rise).
The warning comes as economists at the ITEM Club issued a bleak report cautioning that Britain faces a prolonged period of weak growth and a surge in unemployment, driven by disruption and surging energy prices caused by the renewed conflict in the Middle East. The UK economy had remained relatively resilient since Donald Trump's war on Iran began in March, but that could now be at risk.
All major central banks have expressed concern about the impact of the war in the Middle East and its influence on rising prices. The Bank's decision on Thursday will be closely watched for signs of how policymakers intend to balance the competing pressures of weak growth and stubborn inflation.
