The Bank of England has warned that interest rates are likely to rise if the war in Iran continues, with inflation now on course to reach 4 per cent. Its nine-member monetary policy committee voted 6 to 3 yesterday to leave borrowing costs at 3.75 per cent, the sixth hold in a row.

The decision was expected by markets and the pound traded flat against the dollar after the announcement.

The Bank expects inflation to rise to more than double its 2 per cent target in the early months of next year, because of the surge in global oil and gas prices since the Middle East conflict began more than six months ago. More than half of the overshoot is down to the war in Iran, the committee said.

Andrew Bailey, the Bank’s governor, said that the longer hostilities continued, “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”.

In a statement explaining his vote to hold, Bailey wrote that there was now a “more prominent” upside inflation risk because of the re-intensification of fighting between the United States and Iran in recent weeks, adding that there seemed now to be a “loss of urgency to find solutions”.

The Office for National Statistics reported this week that inflation jumped to 3.1 per cent on an annual basis in August, up from 2.9 per cent the previous month.

The committee said it was not overly concerned about wage growth or company profit margins, the so-called second-round effects that typically occur after an inflation shock.

Bailey was one of six members who voted to keep policy unchanged. Huw Pill, the Bank’s chief economist, and the external members Catherine Mann and Megan Greene voted to lift the base rate by 0.25 percentage points to 4 per cent.

UK government borrowing costs fell after the announcement. The yield on the benchmark ten-year bond slid by 0.10 percentage points to 5.2 per cent and the yield on the 30-year bond dipped by 0.14 percentage points to 5.72 per cent. Yields move inversely to prices. The FTSE 100 gained 0.6 per cent.

The price of a barrel of Brent crude oil dropped by 2.3 per cent to $103.40, down from recent highs near $110, leading to corresponding falls in European and US sovereign bond yields.

Dani Stoilova, European economist at BNP Paribas, said: “The MPC remains hesitant to hike, unlike other major central banks.”

Rob Wood, chief UK economist at Pantheon Macroeconomics, said that the committee’s focus on the upside risks of inflation indicated that “a November hike [is] highly likely unless energy prices fall sharply”, adding that another rate rise would come in February. The committee next meets on 5 November.

Alongside the conflict, the Bank warned of stronger-than-feared food price inflation because of climate change and the El Niño weather pattern, of the Russia and Ukraine war disrupting global grain supplies, and of excessive demand for components used in the roll-out of artificial intelligence.

Most of the committee thought Britain was at least nearing the adverse scenario mapped out at its previous meeting in July, in which the Middle East war causes a lasting increase in energy prices and requires several interest rate rises.

The Bank said GDP was now expected to grow by 0.4 per cent in the third quarter of this year, after a series of better-than-expected monthly output readings. In the first six months of the year, Britain expanded at the fastest pace among the G7 economies.

The Bank has also proposed to the Treasury a restructuring of its bond-selling programme, known as quantitative tightening, that would shrink its balance sheet by an average of £46bn a year until 2034. The Treasury must decide whether to implement the package by April 2027.

The US Federal Reserve lifted its main interest rate on Wednesday for the first time in three years, to a range of 3.75 per cent to 4 per cent. The Bank of Japan is expected to raise its main interest rate today, after the European Central Bank did so last week.

About the author

Amy Ingham

Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College’s journalism school. Her recent reporting includes British Steel’s nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.

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CANBERRA, Australia — Australia Lags Behind UK Canada Sovereign AI Capability metrics as leading technology policy experts and industry analysts warn that chronic underinvestment in domestic supercomputing infrastructure and fragmented federal funding risk reducing the nation to a permanent state of foreign digital reliance.

According to comparative policy assessments released by technology intelligence researchers and public sector advisory groups, Australia is rapidly falling behind like-minded peer economies in the race to establish independent artificial intelligence infrastructure. While partner nations such as the United Kingdom and Canada have committed billions of dollars toward building dedicated national AI compute reserves and native foundational models, Australia’s domestic capability remains constrained by modest public grants, fragmented university compute clusters, and heavy reliance on offshore hyperscale cloud platforms owned by multinational tech conglomerates. Tech policy advocates caution that without a targeted national sovereign AI mission, Australia faces severe vulnerabilities surrounding data sovereignty, national security, intellectual property loss, and supply chain disruptions during international crises.

Industry analysts emphasize that securing sovereign AI infrastructure is increasingly recognized as a fundamental component of national economic resilience.

Public Investment Disparities Highlight Australia’s Compute Deficit

Comparative fiscal data reveals a widening capital expenditure gap between Australia and peer Commonwealth nations.

While the United Kingdom established the multi-billion-pound AI Research Resource to construct dedicated national supercomputing clusters equipped with thousands of advanced graphics processing units, and Canada committed over two billion Canadian dollars toward its Sovereign AI Strategy, Australia’s direct public investments remain significantly smaller and geographically scattered across isolated research initiatives. Local researchers and domestic AI startups frequently report months-long wait times to access high-performance computing clusters operated by national science agencies like the CSIRO or university consortia. Consequently, domestic developers are routinely forced to export sensitive training datasets to foreign-hosted cloud environments to build and fine-tune complex algorithmic models.

The compute bottleneck severely restricts local capability, preventing domestic firms from scaling competitive commercial solutions onshore.

• Capital Expenditure Deficit: Australian public funding commitments for AI infrastructure represent a fraction of per-capita investments made by London and Ottawa.
• Severe Compute Scarcity: Local researchers face structural wait times for high-performance graphics processing units, forcing workloads into foreign cloud environments.
• Capital Flight of IP: Early-stage domestic AI startups increasingly relocate operations abroad to access scalable computational power and venture capital.
• Data Sovereignty Risks: Processing domestic agricultural, healthcare, and defense datasets on foreign infrastructure creates regulatory and national security vulnerabilities.

The widening investment divide threatens to relegate Australia from a developer of advanced technology to a passive consumer of offshore algorithms.

Foreign Cloud Reliance and Strategic Vulnerabilities

Over-dependence on foreign-owned hyperscale infrastructure poses long-term economic and national security risks for Australian enterprises.

Although major global tech giants have announced billions in capital expenditure to build commercial data centers across Sydney and Melbourne, domestic policy experts stress that hosting physical data centers on Australian soil does not equate to true sovereign capability. Because the underlying hardware, proprietary AI architectures, and foundational model weights remain controlled by foreign corporate entities subject to external legal jurisdictions, Australian organizations remain exposed to sudden service modifications, foreign regulatory changes, and international supply chain disruptions. Furthermore, reliance on foreign commercial platforms limits Australia’s capacity to build culturally nuanced language models optimized for localized indigenous languages, public sector governance, and unique regional industry needs.

Sovereignty experts argue that true capability requires local ownership and operational control over the full technological stack.

Building domestic compute infrastructure remains critical to ensuring national digital autonomy during geopolitically turbulent periods.

Commercialization Bottlenecks and Brain Drain of Domestic Talent

The lack of scalable national compute infrastructure accelerates a damaging brain drain of world-class Australian engineering talent.

Despite producing highly cited artificial intelligence research across top-tier universities, Australia struggles to translate academic discoveries into commercialized enterprise applications. Highly qualified machine learning PhD graduates and specialized data engineers routinely accept recruitment offers from North American and European tech hubs where access to advanced compute resources and private equity funding is abundant. Venture capital figures indicate that Australian AI startups attract significantly lower late-stage growth capital compared to global peers, further entrenching the reliance on foreign corporate acquisitions to scale local innovations.

Without robust domestic commercialization pathways, Australia effectively subsidizes talent development for foreign technology ecosystems.

Retaining domestic technical expertise requires creating an environment where high-ambition research can be executed locally.

Calls for a Unified National Sovereign AI Mission

Industry leaders and policy institutions are urging federal lawmakers to enact a centralized, fully funded national AI capability strategy.

Advisory bodies recommend that the federal government establish a dedicated National AI Compute Reserve, mirroring successful international models, to provide subsidized, secure computational access for domestic researchers, startups, and public sector agencies. Additionally, experts advocate leveraging Australia’s abundant renewable energy assets and critical mineral supply chains to position the nation as a regional hub for green, energy-efficient AI data center processing. By aligning national energy policy, supercomputing investments, and targeted commercialization incentives under a single framework, Australia can build the sovereign infrastructure required to protect its digital economy.

Enacting a comprehensive national strategy will determine whether Australia can achieve digital independence in an AI-driven global economy.

Prioritizing sovereign compute capability is vital to securing Australia’s future technological and economic autonomy.