The Bank of England was forced into a significant policy rethink on Thursday, holding interest rates at 3.75% while warning that the energy market turmoil triggered by the Iran war had created conditions in which rate hikes were becoming more likely than cuts. The unanimous hold decision came as global oil and gas prices continued to rise following the outbreak of the US-Israel conflict against Iran, threatening to push UK inflation above 3%. The Bank said it stood ready to act as necessary to return inflation to its 2% target.
The energy market disruption caused by the Iran war has been the defining factor in the Bank’s changed outlook. Before the conflict, the UK had appeared to be on a clear path toward lower inflation and eventually lower interest rates. The war has reversed that picture, forcing the committee to reassess the entire near-term monetary policy trajectory.
Governor Andrew Bailey said the Bank was monitoring events closely and would not allow a persistent inflation shock to go unchecked. He pointed to rising petrol prices as early evidence of the war’s economic reach and warned that household energy bills could climb sharply if supply disruption continues through the year. The Bank’s message was one of vigilant readiness rather than immediate action.
UK financial markets reacted with notable hawkishness after the announcement. Gilt yields rose, the pound strengthened against the dollar, and the FTSE 100 declined as traders priced in the prospect of tighter monetary policy. Analysts said five-year fixed mortgage rates were already at multi-year highs and could rise further if rate hike expectations solidified.
The internal debate within the monetary policy committee has evolved significantly since the war began. Previously dovish members have adopted a more cautious stance, and even the most consistent advocates for lower rates have indicated openness to tightening under some scenarios. The Bank’s next meeting is expected to be one of the most closely watched in recent memory.
