The Bank of England warned interest rates will have to rise unless the Middle East crisis eases today - but held off an immediate hike.

The Monetary Policy Committee (MPC) kept the base rate on hold at 3.75 per cent in its latest decision at noon.

Governor Andrew Bailey said so far rising global energy costs were having a 'limited effect on price and wage setting in the UK'. 

But he added: 'The longer this volatility persists, the bigger the impact it will have on inflation, and the more likely it is we will need to raise Bank Rate to ensure that inflation falls back to our 2 per cent target.'

Markets are predicting that the Bank will act at the next meeting in November, with potentially another three 0.25 percentage point increases next year. 

In a surprise move, the MPC also partly suspended so-called quantitative tightening - the process of unwinding assets created to keep the economy afloat during the Credit Crunch. Critics had complained that was making the Government's position worse.

Yields on gilts - the main way the Government borrows - fell to monthly lows after the news broke, in a relief for the Treasury. 

The Federal Reserve unanimously voted to increase its interest rate last night, while the European Central Bank has already made a move and the Bank of Japan is expected to follow suit. 

Mortgage-payers are suffering regardless of the Bank's decision as lenders have started pushing up their own interest rates.

Meanwhile, motorists are facing up to the prospect of record pump prices, as the impact of sky-high oil costs feed through. The RAC has warned that diesel could break the £2-a-litre barrier in the coming days.  

The grim picture comes amid fears that Chancellor John Healey could hike taxes again at the Budget next month.

The public finances have been put under more strain by rising debt interest costs, and the Treasury must also find ways of funding Andy Burnham's multi-billion pound spending commitments. 

It was the sixth time in a row that the Monetary Policy Committee (MPC) has kept rates on hold, having stayed the same since December.

Three members of the nine-person MPC – Huw Pill, Megan Greene and Catherine Mann – voted to hike rates to 4 per cent. That was the same as the last meeting in the summer.

Based on recent wholesale energy prices, the Bank said it was now expecting CPI to rise to about 3.75 per cent by the end of this year and peak at about 4 per cent early in 2027.

In comparison, the previous forecast was for CPI at about 3.2 per cent by the end of 2026.

The committee said the conflict in the Middle East and the impact on energy prices at the UK economy 'remained the dominant source of uncertainty for the inflation outlook'.

Other policymakers on the MPC said the case for raising interest rates was building the longer the war goes on.

Quantitative easing - or QE - saw the Bank effectively print money to buy nearly £900billion of government bonds in tranches between 2009 and 2021. 

That helped boost the economy through turbulence when interest rates were at historic lows.

However, from September 2022 the Bank started unwinding those positions, selling the debt into the market in a process of Quantitative Tightening (QT).

Last September the MPC voted to slow the pace of QT from £100billion a year to £70billion.

Some £488billion of gilts remain, with £120billion due to mature in 2049 or later now set to be kept on the BoE's books permanently to back its banknotes.

Another £222billion of gilts maturing by 2034 will be allowed to resolve on that schedule, while the remaining £146billion will be sold.

That is equivalent to £20billion a year of sales and £46billion a year of unwinding overall.

The BoE will also pause all sales until April pending consultations on whether gilts can be sold directly to the Treasury's Debt Management Office at market ​prices.

There are hopes that could prevent a situation where the Bank has to accept low prices for small ⁠residual amounts of gilts.

Suren Thiru, ICAEW Chief Economist, said: 'By keeping interest rates on hold, policymakers have chosen patience over panic, balancing the inflationary fallout from the Iran war-induced energy shock against little evidence that it is fuelling more persistent, economy-wide price pressures.'

But Nigel Green, head of financial advisory firm deVere Group, warned: 'Every major central bank at the table is acting except one: the feet-dragging Bank of England.

'The Fed has moved. The ECB has moved. The Bank of Japan looks ready to move. The Bank of England is choosing stillness while inflation runs hot, and stillness has a cost.'

He added: 'Britain imports too much of its energy to treat fuel-driven inflation as background noise. 

'When petrol does the damage it's done this month, waiting for a tidier picture is how a central bank gets overtaken by events.'

It comes against a backdrop of rising prices in the UK, with headline CPI inflation increasing to 3.1 per cent in August, from 2.9 per cent.

That marked a five-month high and shows CPI inflation has moved further away from the Bank of England's 2 per cent target rate.

Many economists are forecasting the cost-of-living to rise further, with households facing another rise in their energy bills from next month, which could prompt the Bank to raise interest rates in the months ahead.

Experts pointed out that services inflation – which reflects prices in the UK's dominant industry – stayed at 3.4 per cent in August, indicating a lack of so-called second round effects – meaning things such as wage demands and broader shop price increases.

However, inflation is expected to be pushed up when Ofgem's next energy price cap kicks in from October, which will see household energy bills rise by 4 per cent for a typical dual-fuel household.

'However, mounting inflationary pressures, alongside resilient growth data, may eventually grant scope to raise rates without materially damaging the economy.'

Economists for Pantheon Economics said there is a chance the MPC 'toughens its language' at the next rates announcements 'to open up the possibility of a November hike if energy prices keep ramping up'.

'A 4% inflation peak would already be too hot to hold, but further energy price rises could take inflation even higher,' they said.

'The MPC needs to be ready.'