A unanimous vote to hold interest rates at 3.75% by the Bank of England on Thursday reflected the deep uncertainty facing UK policymakers as the war involving the United States, Israel, and Iran continues to disrupt global energy markets and threaten UK inflation. The decision to hold rather than cut was driven by the changed inflationary outlook created by the conflict, which has sent oil and gas prices sharply higher. Officials warned that borrowing costs could need to increase in the months ahead if the situation does not improve.
The Bank had been building toward a rate reduction, encouraged by falling inflation and a softening labour market. The outbreak of the Iran war has fundamentally disrupted that process, replacing the case for easing with the risk of tightening. The Bank now expects inflation to rise to around 3.5% in March and remain above its 2% target throughout 2026.
Governor Andrew Bailey said the war had created an unwelcome external shock at a delicate moment in the UK’s economic recovery. He warned that the effects were already visible through rising petrol prices and said the risk of higher household energy bills later in the year was real. The Bank would, he said, act as necessary to keep inflation anchored around its target.
The financial markets’ response was firmly hawkish. UK government bond yields rose, the pound strengthened against the dollar, and the FTSE 100 fell as traders repriced the outlook for UK interest rates. A June rate hike is now widely expected by City analysts, with some predicting a second before the year is out.
Internal Bank dynamics are evolving in response to the changed outlook. Members who had been inclined to cut rates before the war’s outbreak have stepped back from that position, while others have explicitly raised the possibility of hikes. The committee’s next meeting will be watched closely as an indicator of how the balance of opinion has shifted in the intervening weeks.