In a closely watched decision, the Bank of England voted unanimously to keep its base rate at 3.75%, choosing stability over action as the geopolitical fallout from the Iran war rattles global markets. The rate-setting committee acknowledged that the conflict had created fresh inflationary pressure that could force its hand in the months ahead. This marks a sharp reversal from the rate-cutting environment that economists had anticipated at the start of the year.
The conflict between the United States, Israel, and Iran has been directly linked to a spike in global energy prices, which threatens to push UK inflation above the Bank’s comfort zone. Before the war began, forecasters had expected inflation to ease toward the 2% target by April, partly due to measures introduced by the chancellor. Those projections now look increasingly uncertain as energy market volatility continues.
Andrew Bailey, the Bank’s governor, described the energy price surge as a direct consequence of the war and said the most effective remedy would be restoring disrupted supply lines. He acknowledged that higher petrol prices were already biting and that domestic energy bills could follow later in the year. The Bank said it was monitoring the situation carefully and stood ready to respond.
Financial markets interpreted the decision as more hawkish than expected, pushing up UK government borrowing costs and sending the FTSE 100 lower. The pound rose against the dollar as investors recalibrated their expectations for UK interest rates. Traders are now pricing in a rate increase as early as June, followed by a further hike to 4.25% by year end.
Some MPC members had previously favoured cutting rates before the war broke out, but the conflict has shifted opinion within the committee. Even Swati Dhingra, long associated with the dovish wing of the MPC, suggested rate hikes might now be warranted. The Bank’s next move will depend heavily on whether the geopolitical situation stabilises or escalates further.