Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.

• Conflict in the Middle East ends immediate hope of interest rate cuts and threatens hikes.
• Bank of England acted too slowly in 2021-22 and will not want to repeat mistakes.
• High rates will hinder economic growth and damage an already weakening labour market.

The Bank of England’s decision to keep interest rates unchanged at 3.75% reflects a growing sense of caution within the Monetary Policy Committee. While inflationary pressures in the UK had been easing in recent months, the rapidly escalating crisis in the Middle East has introduced a new and potentially powerful inflationary risk.

Oil and natural gas prices have risen significantly in global trading markets, reflecting concerns about possible disruptions to supply and key shipping routes. If these increases are sustained, the impact could quickly feed through into higher transport costs, rising manufacturing expenses and more expensive household energy bills.

The Bank will be keen to be on the front-foot in their fight against inflation. Policymakers at the Bank, along with those at central banks across the globe, were criticised for being too slow to act when global inflation began to rise in 2021-22, taking a gradual approach to raising rates that failed to tighten the monetary supply quickly enough. Their justification then was that these were ‘transitory’ inflationary pressures, rather than structural. The pressures they must consider now are not yet structural, but policymakers will undoubtedly be ready to act at pace if necessary.

Interest rates are unlikely to fall anytime soon and could even rise again. Businesses hoping for lower borrowing costs instead face the prospect of rates remaining elevated for longer at a time when many sectors are already dealing with higher operating costs. This will dampen corporate investment, particularly in recruitment, undermining government attempts to reverse rising unemployment and generate growth in the economy.

Just as businesses and consumers alike had begun to dream of a low-interest rate environment, inflationary pressures have been reignited. The Bank has a tough balancing act on its hands, knowing that raising rates could hinder economic growth. But its main priority will always be stabilising prices. Policymakers will not be afraid to hike interest rates if necessary to prevent spiralling inflation.