The Bank of England's Monetary Policy Committee (MPC) unanimously voted on Thursday to maintain interest rates unchanged, with all nine members signaling they stand ready to take action against any potential inflation surge triggered by the Middle East conflict. This stance prompted traders to increase bets on interest rate hikes within the year. All nine MPC members voted to keep the rate at 3.75%, marking the first unanimous decision in four and a half years. Meeting minutes indicated a significant shift in policy tone, as the ongoing conflict disrupts production in the world's most critical oil-producing region and hinders tanker passage through the key Strait of Hormuz. Policymakers left the door open for potential rate increases, with Governor Andrew Bailey warning that policy must "address the risk of more persistent effects on UK CPI inflation." He added in a separate statement, "Whatever happens, our job is to ensure inflation returns to the 2% target." Traders have now fully priced in two 25-basis-point rate hikes by year-end. UK government bonds extended earlier losses, with the two-year yield rising as much as 20 basis points to 4.30%, while the pound strengthened 0.4% against the US dollar to 1.3310. The nine-member MPC removed language from its February decision that had suggested to investors the benchmark rate "could be cut further." Swati Dingra, one of the Bank of England's most dovish officials, emphasized the severity of the challenges, stating that interest rate hikes might be necessary if a sustained energy supply shock occurs. Several policymakers noted that, absent the conflict, they would have supported a rate cut. Since Iran was first attacked in late February, traders have reversed bets on further policy easing by the Bank of England, with markets now viewing a rate hike as more likely than a cut. European natural gas prices surged overnight after missile attacks from Iran damaged the world's largest liquefied natural gas export facility, with benchmark futures rising as much as 35% in early Thursday trading. The US Federal Reserve also held rates steady on Wednesday evening, with outgoing Chair Jerome Powell stating it was too early to assess the war's impact on the US economy. The European Central Bank is expected to keep policy unchanged later today. Bailey pointed to signs that the turmoil is already affecting UK consumers through higher petrol costs and warned of risks that household energy bills could rise later this year. The Bank of England significantly raised its short-term inflation forecast, now expecting price growth to accelerate to 3.5% in March, about half a percentage point higher than pre-conflict projections. The committee stressed that monetary policy cannot influence soaring global energy prices, and the governor emphasized that the best solution depends on restoring safe passage for vessels through the Strait of Hormuz. However, as the crisis evokes painful memories of the energy price shock following the 2022 Russia-Ukraine conflict, the MPC remains vigilant about "second-round effects" of persistently high inflation. Although inflation reached double digits at that time, sparking criticism of the Bank's slow response, officials now face a distinctly different economic backdrop. Data released hours before the Bank's decision showed the UK labor market performing better than expected, though it has weakened in recent quarters.