City economists warn that a resurgence in oil prices linked to escalating conflict in the Middle East could compel the Bank of England to revise its economic forecasts and potentially raise interest rates later this year.

Ahead of the Bank’s Monetary Policy Committee meeting scheduled for Thursday, most economists expect interest rates to be held steady at 3.75%, with no immediate hike anticipated. However, renewed tensions between the United States and Iran have reignited concerns about energy supply disruptions, which could push oil prices back above $100 per barrel—levels last seen in April and May.

The breakdown of the fragile ceasefire between the two countries has already driven Brent crude prices above the $100 mark briefly on Thursday, before retreating to around $96 per barrel on Friday. This represents a significant increase from earlier this month, when oil traded near $71 per barrel. Gas prices have also surged in recent days, adding pressure just as European nations prepare for the crucial pre-winter period when they replenish gas storage facilities.

The recent volatility challenges the resilience the UK economy has demonstrated since March, when hostilities first escalated. Economists caution that sustained high oil prices could revive inflationary pressures, complicating the Bank’s efforts to maintain price stability.

Deutsche Bank’s chief UK economist, Sanjay Raja, noted that a continued escalation—including persistent air strikes or blockades of vital maritime routes for oil tankers—could increase the likelihood of interest rate rises. “We see upside risks to the interest rate outlook in the near term, with much dependent on the duration of the unfolding energy shock,” Raja said.

Similarly, Mohamed El-Erian, professor at the Wharton School and former chief economist of the International Monetary Fund, emphasized the potential impact of oil prices remaining elevated above $90 per barrel. He noted that such a scenario would exert significant upward pressure on headline inflation, possibly prompting UK policymakers to adjust their outlook.

Despite these concerns, the Bank of England’s nine-member committee is expected to maintain the current interest rate for the immediate future. In the previous June meeting, two members voted to increase rates in response to inflation risks, but the majority favored holding steady.

With geopolitical uncertainty unfolding and energy markets experiencing renewed volatility, the Bank will closely monitor developments that may influence inflation dynamics and economic growth in the coming months.