Why the BOE and Fed Are On Different Rate Paths as Iran War Spikes Inflation

The Bank of England in London (DREAMSTIME)

Key Points

• The Bank of England is expected to keep its benchmark interest rate unchanged at 3.75% on Thursday.
• The decision would put the Bank of England at odds with the Federal Reserve and the European Central Bank, which both recently hiked rates.
• U.K. inflation rose to 3.1% in August, driven by energy costs from the Iran war, while core inflation remained unchanged at 2.6%.

The Bank of England probably won’t serve up any shocks on Thursday, but its policy decision is still likely to put it at odds with both the Federal Reserve and the European Central Bank.

The BOE is expected to keep interest rates unchanged at 3.75%, having done the same at its last meeting in July. The Fed hiked borrowing costs on Wednesday, matching the ECB’s move last week.

The U.K. and the U.S. have both been grappling with a flare-up in inflation tied to the Iran war, but the U.K.’s job market is in a much weaker position, which has strengthened the case for the BOE to wait and see how the conflict plays out rather than tightening too fast.

The decision comes a day after the Office for National Statistics said U.K. inflation picked up again in August, as conflict in the Middle East continued to drive energy costs higher. Consumer prices rose 3.1% from a year ago.

Still, core inflation, which excludes food and energy prices, was unchanged at 2.6%.

The inflation print set the stage for a “hawkish hold,” Kathleen Brooks, research director at the online brokerage XTB, said.

She added that labor-market weakness would bolster the case for keeping rates unchanged. U.K. unemployment remains near a five-year high, data published Tuesday showed.

Write to George Glover at george.glover@dowjones.com

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