12th September 2026
The Bank of England goes into its next interest-rate decision on 17 September with a problem that has become increasingly difficult to read.
On the face of it, there is little reason for the Bank to raise rates. The latest Reuters survey of 65 economists found that every one expected Bank Rate to remain at 3.75% next week. Nearly 90% expected it to remain there for the rest of this year.
But the situation surrounding the decision has changed dramatically.
Oil prices have fallen back from their recent surge towards $110 a barrel. Brent was around $105 on Friday, providing at least some relief from the inflationary shock that had been building. Yet at almost exactly the same time, the Houthis in Yemen have captured the strategically important island of Perim, also known as Mayun, and the mainland town of Dhubab.
That matters because both sit beside the Bab el-Mandeb Strait, the narrow gateway between the Red Sea and the Gulf of Aden. Reuters reports that the Houthi advance is tightening their control over one of the world's most important shipping routes.
The timing could hardly be more awkward for the Bank of England.
The Bank does not set interest rates because the Houthis capture an island. It sets them according to what such events do to inflation, wages, spending and expectations in Britain.
That distinction is important.
The first-round effect of an oil-price rise is relatively straightforward. Petrol, diesel, heating oil, transport and many manufactured goods become more expensive. Businesses face higher costs and eventually some of those costs are passed on to consumers.
The real concern for the Bank is what happens afterwards.
If workers demand higher wages because their household costs have risen, and businesses then raise prices to cover those wages, the original oil shock can turn into a much broader inflation problem. This is what economists mean by second-round effects.
So far, there is relatively little evidence that this has happened on a large scale in Britain. That is one of the main reasons the Bank can afford to wait.
Inflation was 2.9% in July, above the Bank's 2% target, and the Bank expects it to rise to around 3.2% later this year. But the latest economic figures also showed the British economy growing faster than expected. GDP increased by 0.4% in July and was 1.6% higher than a year earlier.
That gives the Bank another reason to be cautious about cutting rates, but it does not necessarily mean that a rate rise is coming next week.
The interesting question is what happens if the oil price rises again.
The recent fall in Brent provides some breathing space. But it is difficult to describe the underlying situation as reassuring. The war involving Iran has already disrupted the Strait of Hormuz, while the Houthi advance now threatens another important route.
Bab el-Mandeb is the southern entrance to the Red Sea and therefore a critical route for ships travelling between Asia and Europe through the Suez Canal. If shipping is forced to avoid the area, vessels can be diverted around the Cape of Good Hope, adding considerable time and cost to journeys.
For Britain, that eventually finds its way into prices.
It is therefore possible to have two apparently contradictory developments at the same time. Oil can fall today because traders believe supplies may be less threatened, while the strategic situation becomes more dangerous and increases the possibility of another price spike tomorrow.
That is the dilemma facing Andrew Bailey and the Monetary Policy Committee.
At its July meeting, the Bank voted 6-3 to keep rates at 3.75%, with three members wanting an increase to 4%. That was already a relatively close vote. The September meeting could therefore be watched almost as closely for the individual votes as for the headline decision.
A 6-3 vote to hold would suggest the Bank remains patient. A 5-4 vote would send a rather different message, even if the official interest rate remains unchanged.
For households with mortgages, loans or other debts, this matters. So does it for savers, businesses and the Government, because higher interest rates feed into the cost of borrowing throughout the economy.
For the moment, the most likely outcome remains a hold.
But the Bank cannot ignore what is happening around the world's oil routes. The oil price may have fallen, but the reasons for worrying about where it goes next have become more serious.
The September decision may therefore be less about what the Bank does on the day and more about what it signals it is prepared to do if the Middle East crisis pushes energy prices higher again.
The danger for Britain is not necessarily an immediate return to double-digit inflation. It is the much more subtle possibility that a temporary energy shock lasts long enough to become part of everyday price and wage expectations.
And that is a problem interest rates can only partly solve.
Note
Oil prices are volatile and changing hour by hour.