The Bank of England held interest rates at 3.75% at its latest meeting but warned British consumers and businesses that the war in the Middle East poses a significant inflation risk that could prompt rate hikes in the months ahead. The monetary policy committee voted unanimously to hold, but its message was stark: the Iran conflict has changed the economic outlook in ways that cannot be ignored. Officials said inflation could rise well above 3% and remain elevated throughout 2026 if energy prices stay high.
Until recently, the UK had appeared to be on the verge of a period of monetary easing. Inflation was retreating, wage pressures were easing, and the labour market was cooling. The outbreak of war involving the United States, Israel, and Iran has disrupted this picture by driving global oil and gas prices higher in ways that directly threaten the UK’s cost of living.
Governor Andrew Bailey warned that the effects were already visible at UK petrol stations and could worsen if supply chain disruptions persist. He said the Bank was watching the situation carefully and would act to keep inflation anchored if required. His comments combined a measured acknowledgement of the risks with an attempt to keep market expectations in check.
Despite his caution, markets quickly moved to price in two quarter-point rate hikes before year end, with the first expected in June. UK gilt yields rose and the FTSE 100 fell as investors adjusted to the prospect of tighter policy. The pound strengthened against the dollar following the Bank’s announcement.
For households, the combination of rising mortgage rates and potentially higher energy bills represents a significant financial challenge. Chancellor Rachel Reeves is said to be exploring energy support measures for vulnerable families. The Bank’s next decision will be shaped by whether the conflict shows any signs of resolution and how inflation data evolves in the coming weeks.