The Bank of England resisted what would have been a well-supported rate cut on Thursday, instead voting unanimously to hold at 3.75% after the Iran war fundamentally changed the inflation equation for the UK economy. Policymakers warned that rising energy prices triggered by the US-Israel conflict could push inflation above 3% and make rate hikes more likely than cuts in the months ahead. The decision reflects a central bank operating in a transformed policy environment created not by domestic conditions but by geopolitical events far beyond its borders.
Before the war began, the case for a rate cut had been building. Inflation was cooling, wage growth was slowing, and the labour market was softening. Those conditions still exist, but they have been overshadowed by the energy price surge that has followed the outbreak of hostilities against Iran. The Bank now expects inflation to rise to approximately 3.5% in March and remain above its 2% target well into 2026.
Governor Andrew Bailey acknowledged the policy challenge created by the conflict. He noted that the most direct solution — restoring disrupted energy supply lines — was beyond the Bank’s control and required a geopolitical resolution. In the meantime, the Bank would use its monetary tools to prevent the energy shock from becoming entrenched inflation. For now, however, it was choosing to hold and watch.
Markets reacted as though the Bank had signalled imminent tightening. UK gilt yields rose, the FTSE 100 fell, and the pound gained against the dollar as traders priced in June and year-end rate hikes. Five-year fixed mortgage rates were reported to be at their highest levels since early 2025, already reflecting the changed expectations.
Within the committee, opinion has evolved significantly. Previously dovish members have pulled back from their advocacy for rate cuts, while some have openly acknowledged the possibility of tightening. The coming months will test whether the Bank’s patient approach is vindicated or whether the Iran conflict forces its hand sooner than anyone currently expects.