The Bank of England’s interest-rate committee meets on Thursday, facing up to the global inflation shock triggered by the illegal US-Israeli war on Iran. The most immediate driver of inflation is the effective closure of the strait of Hormuz by the Iranian military, a global chokepoint through which 20%-30% of the world’s oil, gas and fertiliser inputs are normally shipped from the Gulf states.

Benchmark oil and gas prices are up by more than 40% and 50%, respectively. The UK is highly exposed, given that we are net importers of gas and have an energy market where the global price of gas directly influences the cost of electricity provision. The energy price cap will shield most households until the summer, but UK diesel prices are already up by about 12% and petrol by 6%. The government has intervened with a £53m package to support households in rural areas that heat their homes with oil.

Meanwhile, analysts have warned that the fertiliser shortage could trigger a global food shock worse than that of 2022, following Russia’s full-scale invasion of Ukraine, with food production threatened on multiple continents. The UK is again highly vulnerable, having just 54% self-sufficiency in food, compared with countries such as the US, France and Australia, which are all food self-sufficient, meaning they grow enough food to feed their populations without imports if required.

In the face of sluggish growth – the economy flatlined in the month to January – and gently declining inflation since last summer, the Bank has been gradually lowering interest rates from a peak of 5.25% in the summer of 2024 to 3.75%. The expectation is that these cuts will now end. Financial markets have already priced in the Bank raising interest rates back up to 4% by the middle of next year, immediately reflected in rises in mortgage interest rates.

Central banks, including the Bank of England, came in for a lot of criticism for raising rates too slowly during the last inflation spike caused by the Covid shutdown and the Russia-Ukraine war.

But as the cost-of-living crisis threatens to worsen further for UK households, the Bank should hold its nerve and continue on the path of lowering rates. This is clearly another supply-side shock for which raising (or, in this case, not lowering) interest rates will have little impact on price pressures but further dampen growth and investment.

In fact, there is little evidence that the rapid rate hikes of 2022 made a significant difference to inflation. The clearest driver of reduced price growth was the decline in energy and food prices that eventually materialised in late 2022. A 2025 International Monetary Fund study found that inflation-targeting central banks that rapidly raised interest rates in 2022 fared no better than non-inflation targeting central banks in dealing with the price rises of 2021-2022.

The unfortunate truth is that the current monetary policy framework – not only in the UK but also the US and eurozone – remains shaped by the scars of the last time a major inflation crisis emerged from a war in the Middle East: the early 1970s. Back then, the rise in energy prices set off “wage-price spirals”, as firms raised prices to maintain profits and powerful trade unions responded by pushing up wages. By ramping up interest rates to very high levels in the early 1980s, central banks, led by the US, eventually helped crush lingering inflation, but only at the cost of severe recessions and decades long higher unemployment.

Since then, central banks have become convinced that inflation is driven by the expectations of future price rises of both firms and households. Their key job was to “anchor” such expectations via snuffing out any sign of wage-price spirals with interest rate hikes.

Today, we are in a very different situation. Labour is much weaker due to declining trade unions and a global labour force. Meanwhile, firms in the energy and food sectors in particular have huge market power to set prices as they wish. There was virtually no evidence of “wage-price spirals” during the 2021-23 inflation period, but rather more of “profit-price” inflation, as firms maintained profits by ramping up prices, causing initial supply side shocks to energy and food to ripple through to general inflation.

Furthermore, surveys show that household inflation expectations are largely driven by short-term changes in actual prices of the goods they most often purchase, such as groceries and gas prices, rather than their beliefs in the central banks’ ability to control long-term prices.

The Bank of England should have the courage to admit that its main policy tool is largely irrelevant in dealing with geopolitical supply shocks and their impacts. Instead, it should support and coordinate with the government to implement price caps or controls on essential services to ensure firms don’t pass on price shocks to consumers. Alternatively it could support a changed approach to problematic sectors such as energy through public ownership, for example. As shown by countries such as Spain, these types of measures were more effective in controlling inflation than was raising interest rates.

By lowering interest rates, the Bank can reduce the cost to the government of these interventions and also encourage investment in the clean energy sectors the UK needs to expand in order to wean itself off imported fossil fuels.

Some on the Bank of England’s monetary policy committee appear to realise this. The LSE economist Swati Dhingra noted in a talk last year that “monetary policy action alone, however, is not well-suited to address systemic price shocks in key sectors such as energy and food. It may even be counterproductive, as it could constrain investment that would enhance supply resilience and exacerbate future vulnerabilities”.

Sadly, she appears to be in a minority on the Bank’s rate-setting committee. Let’s hope that changes this week.

• Josh Ryan-Collins is professor of economics and finance at the UCL Institute for Innovation and Public Purpose