The Bank of England kept its key interest rate at 3.75% at its latest meeting, but the Iran war has fundamentally changed the outlook, with financial markets now betting on a rate rise as early as June. The unanimous hold decision came alongside a stark warning that energy prices driven up by the conflict could push inflation above 3%. Governor Andrew Bailey said the Bank was watching events carefully before making its next move.
Before hostilities broke out, the UK had been on track for its first rate cut in months, with inflation heading toward the 2% target and the economy showing signs of slowing. That optimistic outlook was shattered by the US-Israel operation against Iran, which sent oil prices surging and upended energy market forecasts. The Bank now expects inflation to remain above target well into 2026.
Bailey told reporters that rising petrol prices were already visible evidence of the war’s economic reach. He warned that if supply chains remained disrupted, household energy bills could climb significantly in the second half of the year. The Bank’s message was clear: the situation is serious and action may be required.
Despite this hawkish framing, Bailey attempted to cool speculation about a series of aggressive hikes, telling broadcasters the right position was to stay on hold for now. Markets were unconvinced, pricing in a quarter-point rise in June and another before year end. UK gilt yields rose and the FTSE 100 fell as traders repositioned.
The government’s growth plans now face a serious obstacle, with mortgage rates rising and energy costs threatening to increase further. Chancellor Reeves is reportedly exploring ways to support lower-income households through the coming price shock. Opposition parties were swift to exploit the situation politically, pointing the finger at global trade policies and domestic political figures aligned with them.