The Bank of England has held interest rates for the sixth time in a row but said they are likely to rise if high energy prices caused by the conflict in the Middle East continue.

The main Bank rate has been kept at 3.75% despite an increase in the pace of inflation.

The US-Israel war with Iran has disrupted global energy supplies which has led to a sharp increase in petrol and diesel prices.

The Bank now forecasts that inflation will rise more than it previously thought and warned that the price cap on household gas and electricity bills for January is “now expected to rise substantially further”.

Bank of England governor Andrew Bailey said the longer the volatility in energy prices persists, “the bigger the impact it will have on inflation and the more likely it is we will need to raise [the] Bank rate to ensure that inflation falls back to our 2% target”.

The Bank rate is crucial in setting the benchmark for banks and other lenders in setting interest for individuals and businesses borrowing and saving money.

Interest rates are used by the Bank to control inflation, which measures the rate at which prices are rising.

The Bank aims to keep inflation at a target rate of 2%, but it has been above that rate for nearly two years.

On Wednesday, official figures showed inflation had risen to 3.1% in August from 2.9% in July.

The Bank’s Monetary Policy Committee – which makes the rate decision – was split 6-3 in its vote on holding interest rates.

Three members of the nine-member committee voted to raise its base interest to 4%, while the other six voted to keep it unchanged.

There were some positive notes from the Bank of England. It said economic growth had been “more resilient” than expected and now predicts the economy will grow by 0.4% between July and September – up from the 0.1% increase it predicted in the summer.

It also said that because the effect of higher energy costs had not yet spilled over into other areas of the economy, food price rises were now expected to be lower than it had predicted in July.

Food inflation is now predicted to rise 4% by the end of the year, just in time for Christmas. But it is less than the Bank’s previous forecast of 6-7%.

Alongside the interest rate decision, the Bank also said it would halt its so-called “quantitative tightening” programme.

It will pause its annual sale of government bonds – which are a kind of IOU that can be traded on the financial markets – and will instead sell off smaller chunks over eight years.

The Bank bought £895bn of mainly government bonds during periods of economic turbulence such as the global financial crisis and the Covid pandemic to help keep the economy on an even keel.

Since 2022, it has been offloading the bonds, including through sales. This has contributed to higher interest rates – or yields – on bonds, making it more expensive for the government to borrow money.

The Bank said discussions to put in place a plan to reduce the current £488bn stockpile of bonds had started a year ago, implying the change has nothing to do with current market turbulence.

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