The Bank of England is expected to hold interest rates on hold again next week despite fresh uncertainty in the Middle East.
Economists have said they still expect a majority of the Bank's rate-setting committee to opt to keep the base interest rate at 3.75 percent despite attacks in the region and threats from the United States reviving some concerns about inflation.
Several economists, including experts at Oxford Economics and Nomura, have predicted another seven-to-two vote in favor of keeping the current rate.
The latest meeting of the Monetary Policy Committee (MPC) on Thursday, July 30, at which new economic forecasts will also be released, comes against a backdrop of easing inflation in recent months.
The Office for National Statistics (ONS) said earlier this week that UK consumer price index inflation fell to a 15-month low in June of 2.6 per cent.
A slowdown in food and fuel prices helped provide an early positive signal for new Prime Minister Andy Burnham.
The recent drop will have provided some relief to the MPC, which uses interest rates as a tool to control inflation.
However, inflation is now widely expected to rise again and move further away from the Bank's 2 percent inflation target.
The Bank has previously forecast that inflation will rise back to 3.25 per cent later this year as higher energy costs are built into household bills from July.
Despite this, economists in recent weeks had largely forecast that interest rates would remain stable at 3.75 percent for the rest of the year.
But the end of the ceasefire between US, Israeli and Iranian forces has increased uncertainty about the outlook, amid concerns that this could boost inflation.
Oil prices rose above $100 a barrel on Thursday for the first time since May, as attacks on shipping in the Red Sea and threats from President Trump pointed to a possible supply disruption in the region.
Governor Andrew Bailey is likely to address how the renewed hostilities have influenced the Bank's inflation outlook and how the committee is approaching its rate decisions.
Thomas Pugh, chief economist at RSM UK, said he believes oil prices will “largely” drive the path of interest rates over the next year.
“If they stay near $100 a barrel through the summer, a September rate hike would be firmly on the table, with another likely in the winter,” he said.
“However, if there is another peace deal and prices decline a little, we believe the weakening labor market and deteriorating economic outlook will keep the Bank on hold this year, before making three cuts in 2027.”
The escalation of conflict in the Middle East is also likely to affect the Bank's growth prospects, after GDP recovered in May, although it only rose 0.1 percent on the month.
Rate setters could be cautious about raising interest rates amid stagnant growth in the UK economy.
