Surging oil prices have intensified pressure on the Bank of England (BoE) as it approaches its Monetary Policy Committee (MPC) meeting later this week, reigniting discussions over the possibility of raising interest rates before the end of the year. The Committee is set to evaluate its current key rate of 3.75 percent and the pace of its balance sheet reduction amid a persistent sell-off in the UK government bond market and broader inflationary concerns.

Markets currently assign about a 40 percent probability to a rate increase at Thursday’s policy meeting, reflecting heightened uncertainty driven by energy costs climbing above $100 per barrel following renewed conflict in the Middle East. These developments, coupled with robust UK GDP growth and accelerating inflation, have contributed to a growing debate among policymakers on how long the BoE can maintain its current monetary stance.

Economists note that the case for holding rates steady is weakening. Sanjay Raja, an economist at Deutsche Bank, suggested that MPC patience may be dwindling as inflationary pressures prove more persistent than anticipated. This environment contrasts with recent moves by other major central banks: the European Central Bank raised rates on Thursday, and investors widely expect the US Federal Reserve to follow suit.

Voting dynamics within the MPC remain a focal point. Consensus data from LSEG indicates an expectation of six votes in favor of holding rates and three advocating a hike, but some market participants envisage a narrower margin, with a chance of a surprise increase. Akshay Singal, Citi’s global head of short-term interest rate trading, warned that the oil price surge challenges assumptions about the containment of inflationary effects stemming from turmoil in the Gulf region.

Ahead of the meeting, key economic indicators—such as official unemployment and inflation figures—are due for release, further informing policy decisions. The market anticipates four quarter-point rate rises over the next year, an increase from previous expectations of two or three, with a November rate hike now fully priced in.

BoE Governor Andrew Bailey underscored rising inflation risks during a recent Treasury select committee hearing, citing the ongoing Gulf conflict as an “upside risk” to price stability. Some investors have expressed concern that the BoE risks losing credibility if it lags other central banks in raising borrowing costs, potentially weakening the British pound. Ales Koutny, head of international rates at Vanguard, noted that the central bank’s reputation could be at stake should it fail to follow the tightening trend.

JPMorgan’s UK economist Allan Monks forecast inflation to reach at least 4 percent, double the BoE’s target, further complicating the policy outlook.

In addition to interest rate decisions, the BoE is expected to address its quantitative tightening program, which involves reducing its government bond holdings built up during previous crises. Market participants anticipate a slowdown in the balance sheet reduction from £70 billion to £50 billion over the next year, implying around £20 billion in active gilt sales, including some long-dated debt. However, given the recent sharp sell-off in gilts—pushing 30-year yields near 6 percent, the highest since 1998—some analysts suggest the BoE might moderate or pause long-term sales to support the market, an approach supported by Vanguard’s Koutny, who emphasized the potential for signaling support to long-term borrowing costs.