Oil surges to $108, threatening fresh inflation shock - will Bank of England now hike rates this year?

Fresh attacks in the Middle East have pushed oil prices higher this morning, raising the prospect of rate hikes as central bank rate setters prepare to meet this week.Brent crude is trading 3.3 per cent higher at around $108 a barrel, after surging 8.6 per cent to close last week at $104.61.Rising energy prices 'pose a serious headache' for the Bank of England, which meets this week, economists warn.The sharp rise in oil overnight follows new strikes on Saudi Arabian and Iranian ships in the Gulf, in addition to the shutdown of Saudi Arabia's East-West oil pipeline.The closure of the route, which helps Saudi Arabia avoid the Strait of Hormuz and redirect its exports, threatens up to 4 per cent of the world's oil supply.The development suggests the conflict is, once again, moving further away from resolution as the impact of higher oil prices starts to be felt.Chris Beauchamp, chief market analyst at IG, said: 'Oil markets are being subjected to their worst fears all at one – attacks on energy infrastructure, the closure of Hormuz and a breakdown in attempts to restart negotiations.' Andrew Bailey has signalled concerns over inflation ahead of this week's Bank of England meeting A surge in energy prices has raised fears of a fresh inflation shock ahead of key meetings of the Bank of England, US Federal Reserve and Bank of Japan this week.Markets expect the Bank of England to hold rates at Thursday's Monetary Policy Committee (MPC) meeting, but fears are growing that a series of increases will follow.The surge in oil and gas prices has squeezed motorists, with petrol prices hitting a four-year high last week, according to the RAC.Meanwhile, energy bills, set to rise to a three-year high next month, are now forecast to climb a further 18 per cent in January, according to experts at supplier E.ON.The prospect of another surge in prices triggered a bond market selloff last week, with borrowing costs continuing to edge higher this morning.The benchmark 10-year yield on UK bonds, known as gilts, rose 0.042 percentage points to 5.390, while 30-year gilts inched up 0.032 points to 5.94 per cent.With oil back above $100 and a darkening economic backdrop, traders expect five quarter-point rate rises by this time next year to between 4.75 per cent and 5 per cent, compared with the two or three priced in earlier this month.A November rate hike - while priced in by markets - is unlikely, say economists who argue that higher inflation is contained within the energy sector for now. 'Rising natural gas prices pose a serious headache for the Bank of England ahead of its September 17 meeting,' said economists at ING. 'But there's very little sign that inflation is broadening out beyond energy.'They added: 'A rate hike in November is not impossible, but it is not inevitable,' they said. 'We're sticking to our base case that the Bank will keep rates on hold into next year. If energy prices ease and become less volatile, there is still a valid case for rate cuts in 2027.'Economists at Pantheon Economics said there is a chance policymakers will 'toughen' their language, opening up the possibility of a November rate hike.'A 4 per cent 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.'Governor Andrew Bailey signalled his concerns about inflation to MPs last week, saying the 'upside risks' were rising.The European Central Bank last week raised its base rate, while markets are pricing in an almost 90 per cent chance the Federal Reserve will hike at Wednesday's meeting, which could mark the beginning of a tightening cycle.DIY INVESTING PLATFORMSAJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.Compare the best investing account for you