The Bank of England voted unanimously to keep interest rates at 3.75% on Thursday, but the message accompanying the decision was unmistakably hawkish, warning that the Iran war has introduced an inflation risk that could force rate increases as soon as June. The committee described the conflict as a “new shock” to the economy that has disrupted the path toward lower inflation and borrowing costs. For British households already stretched by years of cost-of-living pressure, the announcement offered little comfort.
The backdrop to the decision is the US-Israel military campaign against Iran, which has sent global energy prices sharply higher in recent weeks. This threatens to push UK inflation back above 3% at a time when the Bank had been projecting a return to its 2% target around April. Officials now expect inflation to rise to around 3.5% in March and remain above target well into 2026.
Governor Andrew Bailey attempted to frame the Bank’s stance as cautiously neutral rather than firmly hawkish, stressing that the decision was to stay on hold and assess the situation. He urged financial markets not to assume that rate hikes were inevitable, noting that much would depend on how the conflict evolves. At the same time, he acknowledged that the Bank would not hesitate to act if the inflation picture worsened materially.
Markets were not entirely convinced by the governor’s moderating language, with traders continuing to price in rate hikes in June and later in the year. UK government borrowing costs rose and the FTSE 100 fell after the announcement. The pound strengthened against the dollar, reflecting expectations of tighter relative monetary policy in the UK.
The implications for everyday finances are significant. Rising mortgage rates and potentially higher energy bills could create a fresh financial squeeze for millions of UK households. The government faces mounting pressure to provide targeted support, particularly ahead of the expected rise in household energy costs in the second half of the year.