The Bank of England may have just put an end to hopes of near-term rate cuts, holding its base rate at 3.75% on Thursday and warning that the war in the Middle East has so significantly altered the UK’s inflation outlook that borrowing cost increases are now more likely than reductions in the months ahead. The monetary policy committee voted unanimously to hold, but the message from Governor Andrew Bailey was clear: the era of anticipated easing has been disrupted by the US-Israel conflict against Iran, which has sent global energy prices sharply higher. For UK households, businesses, and investors, the implications of that message are considerable.
The Iran war’s impact on global energy markets has been rapid and substantial. Oil and gas prices have risen since hostilities began, directly threatening the UK’s progress toward the 2% inflation target. The Bank has revised its near-term inflation forecasts upward, now projecting inflation to rise toward 3.5% by March and remain above target well into 2026.
Governor Bailey said the Bank stood ready to act to prevent the external shock from becoming entrenched domestic inflation. He pointed to rising petrol prices as an early indicator of the war’s economic reach and warned that household energy bills could follow if supply chains remain disrupted. While cautioning against assuming rate hikes were certain, his language carried a clear implication that the balance of risks had shifted toward tightening.
Financial markets responded with a firm hawkish repricing. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar. Traders moved to price in rate hikes in June and again before December, with five-year fixed mortgage rates already climbing to their highest levels since early 2025.
The end of rate-cutting hopes carries significant political as well as economic consequences. Labour’s growth strategy had been premised on falling borrowing costs, and rising rates directly undermine that plan. Chancellor Rachel Reeves faces a difficult few months ahead, balancing the need to support vulnerable households with the fiscal constraints of a challenging economic environment. The Bank, meanwhile, enters a period of heightened scrutiny as markets, politicians, and the public watch closely for any sign of what it will do next.