The UK’s inflation recovery is under threat from a geopolitical shock far beyond the Bank of England’s control, prompting a unanimous decision on Thursday to hold rates at 3.75% while warning that the Iran war could force borrowing costs higher. The monetary policy committee described the US-Israel conflict against Iran as a new economic shock that had materially changed the near-term inflation outlook for Britain. Officials warned that energy prices driven up by the war could push inflation above 3% and require a policy response in the months ahead.
The UK had been recovering well on the inflation front in recent months. Price growth had been falling steadily toward the Bank’s 2% target, and a rate reduction had appeared imminent. The outbreak of the Iran conflict has disrupted that recovery by sending global oil and gas prices sharply higher, threatening to reverse the disinflationary progress of the previous year. The Bank now expects inflation to rise to around 3.5% in March and remain elevated throughout 2026.
Governor Andrew Bailey described the conflict’s economic reach in practical terms. He noted that higher petrol prices were already affecting UK consumers and warned that energy bills could follow if supply disruption continues. The Bank, he said, retained both the tools and the willingness to act if the inflation recovery was threatened by a persistent energy price shock.
Markets interpreted the Bank’s statement hawkishly. UK gilt yields climbed, the FTSE 100 fell, and the pound strengthened against the dollar as investors priced in a tighter monetary outlook. City analysts now anticipate a rate hike as early as June, with a further move before December. Mortgage rates for five-year fixed deals have already moved to reflect the changed environment.
Within the committee, the shift in tone has been notable. Members who had been inclined toward rate cuts before the conflict are now adopting a more cautious stance, while those with more hawkish leanings have reinforced their view that tightening could be warranted. The Bank’s next decision will come against a backdrop of closely watched inflation data and ongoing geopolitical uncertainty.