The Bank of England kept UK interest rates on hold at 3.75%, with its monetary policy committee voting six to three to maintain the rate amid a volatile Middle East backdrop.
The Bank cautioned that inflation could climb above 4% next year, though it stressed the figure is subject to considerable uncertainty given the risk of a further escalation in the Iran war, adding to cost of living pressures on households.
Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm, said: "The Monetary Policy Committee’s vote to leave interest rates unchanged reflects a geopolitical landscape that is simply too volatile for accurate prediction.
"Inflation expectations are being shaped by events in the Middle East and their impact on energy prices, but the rapidly evolving geopolitical situation makes future price movements difficult to predict.
"Oil prices fell from the end of May, regained momentum through early July, and now again show signs of cooling.
"So far, inflation has remained more stubborn than predicted, standing at 2.6% in June. Yet the concern is not today's inflation rate but tomorrow's. If oil and wholesale gas prices rise again and geopolitical tensions persist, this threatens to push up import costs, while businesses continue to face rising labour and operating expenses. Services inflation also remains stubbornly higher than the Bank would like, suggesting that domestic price pressures have not been fully extinguished.
"Inflation expectations are key. Once households and businesses begin to believe that prices will continue rising, those expectations can become self-fulfilling through higher wage demands and price increases. Preventing that cycle from taking hold is one of the Bank's top priorities.
"For the new Burnham government, an unchanged base rate provides welcome stability rather than a meaningful economic boost, reassuring investors that the Bank stays firmly bound to its inflation target – valuable confidence at a time when the Treasury and the new Chancellor face tough decisions over taxation, public spending and borrowing.
"Any perception that inflation is being tolerated would almost certainly push up government borrowing costs, placing additional strain on public sector finances.
"While policymakers at the European Central Bank have already acted by raising interest rates, Eurozone rates started from a much lower base. The Bank of England has rates at an appropriate level right now, but messages from Committee members suggest that if inflation gathers momentum during the closing months of 2026, they will be ready to act and raise interest rates above the current 3.75%.
Among its UK locations, accountancy and advisory firm MHA has offices in Aberdeen and Edinburgh.
For further information, visit www.mha.co.uk