The Bank of England held rates at 3.75% but warned of future hikes as energy prices surge, while UK bonds rallied on the central bank's decision to extend its debt unwind timeline to 2034.
Oil prices surged due to escalating US-Iran conflict and worries about energy supply disruptions.
Gas prices have surged as the Middle East conflict heightens energy price pressures and inflation risks.
UK bonds rallied, lowering the 30-year yield four basis points to 5.82% as the BoE held rates and buyers were encouraged by the debt unwind extension.
The pound erased gains against the dollar to trade at 1.3374 following the BoE's hold and hawkish warning.
The Bank of England maintained interest rates at 3.75% while signaling potential future hikes if Middle East tensions drive persistent energy price volatility. Governor Andrew Bailey warned that while domestic inflation remains contained, the global energy shock poses significant upside risks to the UK economy. Meanwhile, the central bank extended its debt portfolio unwind timeline to 2034, sparking a rally in long-dated gilts.
The MPC voted 6-3 to hold rates at 3.75%, citing that domestic inflation is currently contained and wage growth is decelerating, despite the looming threat of energy-driven price pressures.
Escalating tensions between the US and Iran have caused oil and gas prices to surge, which the BoE fears will lead to higher inflation and potentially force the committee to raise rates later this year.