MARKET NEWS

The Bank of England is “flying blind” on inflation as policymakers decide whether to raise interest rates over the Iran war.

Economists said a spike in inflation last month gave little clue as to just how high it could climb later this year, making it difficult to decide whether to raise borrowing costs.

Inflation jumped to 3.3pc in March, up from 3pc in February, as the war sent fuel prices rising at the fastest pace in three years.

James Smith of ING warned the Bank lacked clarity about how high prices could rise, with uncertainty over how long the war will continue.

Mr Smith said: “The latest rise in [the] UK headline consumer price index tells us virtually nothing about the scale and duration of the inflation wave to come.

“The Bank of England is still flying blind, with the conflict unresolved.”

Donald Trump announced an extension of the US-Iran ceasefire on Tuesday but shipping traffic through the Strait of Hormuz, a crucial oil trade route, remained heavily disrupted.

Mr Smith expects inflation to peak just above 4pc in August or September after an anticipated spike in household energy bills this summer.

Ruth Gregory of Capital Economics said the months ahead would be “an uncomfortable ride” for the Bank of England.

Policymakers, led by Governor Andrew Bailey, will hold an interest rate meeting next Thursday.

Markets expect borrowing costs to be held at 3.75pc but think interest rates will rise to 4pc by September.

However, both ING and Capital Economics expect policymakers to keep rates on hold for the duration of this year.

Analysts had expected an increase in inflation last month after the Iran war sent the cost of oil soaring, with an immediate impact on fuel prices at the pump.

By the end of March, drivers were paying an extra 20p per litre for petrol and 40p for diesel. Prices have climbed further since then.

Grant Fitzner, ONS chief economist, said: “Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years.

“Airfares were another upward driver this month, alongside rising fuel prices.”

Rachel Reeves said: “This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down.

“Our economic plan is the right one and has put us in a stronger position to support families in the face of this new crisis.”