The Bank of England has signalled that interest rates could rise this year as it attempts to curb inflation following a "significant energy price shock" from the Iran war.

The majority of the Bank's rate-setters voted to keep borrowing costs at 3.75% in April, but indicated they would act "forcefully" should oil prices reach and remain at $130 a barrel for a number of months.

The price of Brent crude hit $126 on Thursday - the highest for four years -following reports the US may resume attacks on Iran.

The governor of the Bank of England, Andrew Bailey, said: "The war in the Middle East is causing inflation to rise again this year.

"We'll continue to monitor the situation and its impact on the UK economy very closely," he added.

The rate of inflation, which measures the pace of price rises, rose to 3.3% in the year to March, further away from the Bank of England's target.

"Whatever happens, our job is to make sure that inflation gets back to the 2% target after the initial impact of the war on energy prices has passed," Bailey said.

As a result of the "uncertainty around the severity and duration" of the war, the Bank considered a range of scenarios to determine how it will react in the coming months.

• In scenario A, energy prices fall back and inflation, as measured by the Consumer Prices Index (CPI), rises to 3.6% at the end of this year before falling below 3% by autumn next year
• In scenario B, energy prices fall back more slowly than in scenario A, inflation rises to 3.7% this year and remains elevated for longer
• In scenario C, the most adverse scenario, oil stays above $120 a barrel for the rest of the year and inflation peaks at 6.2% at the beginning of next year. Such a scenario could see as many as six interest rate rises to 5.5%.

The Bank did not give probabilities as to how likely each scenario was. However, governor Bailey said he placed more weight on scenario B.

Huw Pill, the Bank's chief economist, voted for a rate rise this month, the only member of the nine-member Monetary Policy Committee to do so. Other members said the Bank should wait to see the extent of the inflationary shock.

UK economic growth is expected to be lacklustre this year – expanding by 0.8% in the best case or by 0.7% if conditions worsen.

However, the UK is forecast to avoid a technical recession, which is defined as two consecutive three-month periods of contraction.

Ruth Gregory, deputy chief UK economist for Capital Economics, said the Bank of England's comments suggested "the chances of near-term rate hikes are rising".

She said that if oil prices fall back to around $95 a barrel, "our best guess is still that rates will remain unchanged this year".

"But one or two hikes in the coming months are certainly possible, especially if [oil] prices remain around $115 per barrel, or rise even further."

The sharp jump in the price of oil since the start of the Iran war has already pushed up the price of petrol and diesel for motorists.

But the potential impact goes beyond fuel. The government has warned people could face higher energy, food and flight ticket prices as a result of the war.

Energy bills are expected to rise when the current price cap is revised at the beginning of July.

The upheaval created by the war in Iran has also increased the cost of mortgages for homeowners getting a new fixed deal.

In its report, the Bank said that over the next three years, average payments for those moving to a new mortgage deal are expected to rise by about £80 a month.

About 53% of mortgage holders are expected to see payments rise, the Bank said.

In response to the Bank's latest rate decision, Chancellor Rachel Reeves said: "The war in the Middle East is not our war, but it is one we have to respond to.

"Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we've seen in the past that resulted in higher inflation and higher interest rates."

Shadow chancellor Mel Stride said Reeves had "weakened" the UK economy, and "left us vulnerable in the run up to the latest energy crisis".

"The conflict in the Middle East is pushing up prices - but the UK already had the highest inflation in the G7 thanks to Labour's choices," he wrote on X.

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