The Bank of England’s interest rate-setters all voted to keep borrowing ​costs on hold and said they were “ready to act” to see off risks from war in the Middle East, prompting investors to ramp up their bets on higher ‌borrowing costs later this year.

The BoE’s Monetary Policy Committee voted 9-0 to keep Bank Rate at 3.75 per cent, the central bank said on Thursday. Economists polled by Reuters had mostly expected a 7-2 vote to hold rates.

The MPC said inflation could go as high as 3.5 per cent over the next two calendar quarters, according to BoE staff forecasts, and that it was alert to the risk of higher inflation expectations becoming embedded in the economy.

It also nodded to the risks of an economic ​slowdown which could weaken inflation pressures, but said the bigger risk was one of higher inflation, adding it “stands ready to act as necessary” to keep inflation on track for its 2 per cent ​target.

Governor Andrew Bailey said petrol prices were already higher and household energy bills would go up later this year if the conflict lasts.

“We have held ⁠interest rates at 3.75 per cent as we assess how events unfold,” Bailey said in a statement. “Whatever happens, our job is to make sure inflation gets back to its 2 per cent target.”

Investors moved to price in two ​quarter-point rate hikes by the BoE this year. Yields on two-year British government bonds – which are sensitive to speculation about rates – leapt by a huge 34 basis points on the day, hitting the highest since ​January 2025 at 4.486 per cent.

Some of the day’s surge came earlier on news of more damage to gas infrastructure in Qatar.

Bailey later said markets were getting ahead of themselves in assuming rate rises.

“I would caution against reaching any strong conclusions about us raising interest rates,” he told broadcasters. “Today we’ve given a very clear message. The right place to be is on hold.”

Rob Wood, a former BoE economist who is chief UK economist at Pantheon Macroeconomics, said the surge in oil and especially natural ​gas prices on Thursday – which came after the MPC’s vote on Wednesday – tilted the risks further towards rate hikes.

“Energy futures prices are now on the borderline of where our scenario analysis suggests a hike ​is warranted,” he said.

Luke Bartholomew, deputy chief economist of investment company Aberdeen, said the hurdle to a return to rate hikes was very high but “the economy could be facing a long wait until the next cut.”

Shortly after the ‌BoE announcement, the ⁠ECB left interest rates unchanged but signalled it was ready to act to counter risks to growth and from inflation.

On Wednesday, the US Federal Reserve held interest rates steady and projected a single reduction in borrowing costs this year, although Chair Jerome Powell said uncertainty was high.

DIFFERENCES WITHIN MPC OVER RATES OUTLOOK

Some of the BoE’s MPC members suggested interest rates might need to go up. Catherine Mann said she thought the BoE should consider a longer pause in rates “or even a hike at some point” to stop inflation from getting stuck too high.

Swati Dhingra, who has recently voted for rate cuts, said borrowing costs might need to stay ​on hold or go up in the event ​of a severe and long-lasting hit to oil ⁠and gas supplies.

But Alan Taylor, another recent supporter of rate cuts, said he saw “a high bar to hiking.”

The MPC said it might have more information by the time of its next meeting in late April to better assess the situation.

“There was a range of possibilities for how monetary policy might need to ​respond to different developments and risks,” it said.

The BoE has cut borrowing costs more slowly than the European Central Bank since 2024 because of its ​worries about Britain’s stubbornly stronger ⁠price pressures.

Just when it seemed British inflation would drop to the BoE’s target of 2 per cent and hold there, the jump in oil and gas prices looks set to push it back up possibly to 4-5 per cent, according to analyst forecasts based on Thursday’s energy prices.

That would still be far below the peak of 11.1 per cent in 2022 after Russia’s full-scale invasion of Ukraine, which caused a much bigger spike in energy prices.

INFLATION RISK COMES WITH ECONOMY ⁠WEAK

Data published ​earlier on Thursday showed British wages rose at their slowest pace since late 2020 in the three months to January, potentially ​easing some of the BoE’s inflation worries.

The BoE noted the Iran war was taking place at a time when Britain’s economy was growing only weakly.

But it also showed it was not relaxing its guard on inflation pressures, noting fresh survey data from its ​regional agents which showed pay settlements in 2026 were likely to be 0.2 percentage points higher than its forecast at 3.6 per cent.