The Bank of England left its key interest rate unchanged Thursday, mirroring the Federal Reserve while signaling its readiness to raise borrowing costs should high energy prices threaten to cause a broad and persistent pickup in inflation.

The key point

The U.K.'s central bank left its key interest rate at 3.75%, where it has been since December.

Prices of oil and natural gas have been highly volatile in recent weeks as hopes for an early reopening of the Strait of Hormuz were dashed by a resumption of hostilities between the U.S. and Iran.

Since the onset of the conflict in late February, policymakers around the world have worried that a prolonged period of high prices for oil and natural gas would prompt businesses to raise their prices as they sought to preserve profit margins, while workers would seek higher wages to maintain their purchasing power.

But the big swings in energy prices make it difficult for central bankers to be sure that such second-round effects are either inevitable or unlikely. Against that backdrop of uncertainty, the BOE decided to leave its key rate unchanged, while signaling that it is prepared to tighten policy.

"Our job is to make sure any increase in inflation is temporary," said Gov. Andrew Bailey.

As with the Fed vote, there was significant dissent. Three of the nine members of the Monetary Policy Committee voted for a rise in the key interest rate to 4%.

"The key change in my decision is the collapse of the U.S.-Iran Memorandum of Understanding," said MPC member Catherine L. Mann, having joined the two members who voted for a rate rise in June. "This sporadic continuance of the conflict appears to be the state of play."

The context

The Fed Wednesday left its key rate unchanged, while investors read Chairman Kevin Warsh's comments in a news conference as pushing the prospect of a rate increase further out.

The European Central Bank last week left its key rate unchanged, but investors expect to see a September rate rise unless there is clear progress in reopening the Strait. The Bank of Japan is also expected to hold Friday, while remaining open to another rise later this year.

In contrast to its peers, the U.K. has seen its annual rate of inflation fall since the war began. Its annual rate stood at 2.6% in June, down from 3% in February. Over the same period, eurozone inflation rose to 2.8% from 1.9%, while U.S. inflation picked up to 3.5% from 2.4%.

However, the central bank doesn't expect inflation to remain quiescent, with a regulated cap on household energy prices having risen by 13% this month and likely to increase again in October. It now expects inflation to peak at 3.2% in the fourth quarter and return to its 2% target by early 2028.

What's next?

Even if inflation picks up as the central bank expects, it is not clear that policymakers will feel the need to raise borrowing costs.

Rate setters have stressed the fact that interest rates paid by households and businesses have risen over recent months, adding to the existing restraint on activity.

The jobs market has continued to cool, reducing the likelihood that workers will press for big pay rises. Indeed, a BOE survey released last week found that businesses expect wage growth to slow significantly in the coming 12 months.

Ahead of the meeting, investors had expected the central bank to raise the key rate at least once before the end of this year. But a number of economists expect the central bank to stand pat.

"Our base case remains an extended hold," said Henry Cook, an economist at MUFG. "Wage growth is subdued, and there is little evidence of second-round inflation effects."

In an "adverse" scenario in which oil prices settle above $100 a barrel, the BOE would expect inflation to peak at 4.5% in the second quarter of 2027, with "much stronger" second-round effects. Such an outcome would likely prompt a larger aggregate rise in rates than the half a percentage point expected by investors before the meeting.

But some rate setters are already looking to a possible resolution of the conflict and seeing the potential for more rate cuts.

"If the risks were to subside, and the underlying disinflation process continued, I would consider resuming the cutting cycle," said Dave Ramsden, a deputy governor.