Britain’s central bank has frozen interest rates at 3.75%, choosing to hold rather than cut or raise amid a fast-moving geopolitical situation that threatens to reignite inflation across the UK. The Bank of England’s monetary policy committee voted unanimously to maintain the current rate, but policymakers warned that the ongoing war involving the United States, Israel, and Iran has created conditions that could force rate hikes in the coming months. The decision marks a stark contrast to the easing cycle that had been widely anticipated just weeks ago.
The war against Iran has had a direct and significant impact on global energy markets, driving oil and gas prices higher in ways that threaten the UK’s disinflationary trajectory. The Bank had expected inflation to return to the 2% target around April, but has now revised those projections upward, forecasting inflation of around 3.5% in March and continued above-target price growth throughout 2026.
Governor Andrew Bailey described the war as a new economic shock that required careful monitoring and a readiness to act. He acknowledged the early pain being felt by drivers at UK petrol stations and warned that energy bills could rise later in the year if supply disruption continues. While urging markets not to overreact, he made clear that the Bank retained the tools and willingness to tighten if necessary.
The market reaction underscored the changed expectations. UK government bond yields rose, the FTSE 100 fell, and the pound gained against the dollar. City traders moved to price in at least one, possibly two, rate hikes before the end of 2025, with June emerging as the most likely timing for the first increase.
Several committee members who had been inclined toward rate cuts before the war broke out have shifted their positions, reflecting the changed inflation environment. Even the most dovish voices on the committee acknowledged that persistent energy price inflation could make tightening unavoidable. For UK households, the prospect of higher borrowing costs and energy bills simultaneously represents a formidable financial challenge.