The Bank of England kept its benchmark rate at 3.75% on Thursday while putting UK borrowers and investors on alert about the risk of future rate hikes stemming from the energy price shock triggered by the Iran war. The monetary policy committee’s unanimous decision to hold was paired with unusually direct language about the inflationary threat posed by the US-Israel conflict against Iran. Officials said the war had introduced a new and significant economic shock that could force the Bank to raise borrowing costs within months.
The conflict has disrupted global energy markets in ways that directly threaten UK inflation. Oil and gas prices have risen sharply since hostilities began, and the Bank has revised its inflation projections upward significantly in response. It now expects inflation to reach approximately 3.5% in March and remain well above its 2% target throughout 2026.
Governor Andrew Bailey said the Bank was watching events in the Middle East carefully and stood ready to respond through interest rate policy if necessary. He acknowledged that rising petrol prices were already affecting UK consumers and warned that household energy bills could follow if the supply disruption continues. For now, the Bank was choosing to hold and gather more information before acting.
Markets moved to price in at least one, possibly two, rate hikes before year end. UK government bond yields rose, the pound strengthened against the dollar, and the FTSE 100 declined as investors adjusted their expectations. Analysts said the shift in expectations had already fed through to higher five-year fixed mortgage rates, raising costs for homeowners.
MPC members who had previously favoured rate cuts acknowledged the changed environment, with some indicating openness to tightening if inflation persists. Economist Swati Dhingra, previously the committee’s most consistent dove, suggested rate increases might be necessary under some scenarios. The Bank’s next meeting will be an important test of whether the hawkish signals delivered on Thursday translate into concrete action.