Thursday’s Bank of England decision to hold rates at 3.75% is less about what the committee decided and more about what the world has become: a place where a war in the Middle East can rapidly overturn carefully calibrated monetary plans and put British households back on the defensive. The unanimous hold was expected, but the context in which it was delivered was anything but routine. Officials warned that rising energy prices driven by the Iran conflict could push inflation above 3% and force rate increases within months.
The UK had been approaching what many hoped would be a turning point — a period of gently falling rates that would ease the pressure on mortgages and support economic activity. The US-Israel war against Iran has disrupted that scenario by pushing oil and gas prices higher in a matter of weeks. The Bank now expects inflation to remain above target well into 2026, a sharp departure from forecasts made just before the conflict began.
Governor Andrew Bailey was candid about the challenge. He said the most direct solution to the inflation threat — restoring energy supply chains disrupted by war — was beyond the Bank’s power. Within its remit, the Bank would monitor the situation and use interest rates if necessary to prevent inflation from becoming entrenched. For now, that meant staying on hold while assessing how events unfold.
Market participants interpreted the Bank’s communication as hawkish, pricing in rate hikes in June and later in the year. UK government borrowing costs rose, the FTSE 100 fell, and the pound strengthened against the dollar. Five-year fixed mortgage rates hit their highest levels since early 2025, according to analysts.
The committee’s internal debate is revealing. Members who had leaned toward cuts before the war are now holding fire, while others have openly discussed the possibility of tightening. MPC member Megan Greene cautioned that after five years of above-target inflation, British households and businesses were unusually sensitive to further price shocks. That sensitivity will weigh heavily on policymakers as they navigate the months ahead.