The Bank of England kept UK interest rates unchanged at 3.75 per cent today, but governor Andrew Bailey signaled that persistent energy disruptions from the ongoing US-Israeli war with Iran could trigger future rate hikes. In a unanimous vote, the central bank’s nine-member Monetary Policy Committee (MPC) opted for stability, a clearer outcome than many analysts had predicted, while cautioning that households and businesses could face renewed financial strain if global oil and gas prices remain elevated.
Bailey highlighted that monetary policy “must respond to the risk of a more persistent effect on UK CPI inflation” stemming from the Middle East conflict. He noted that the recent period of high inflation has left consumers and companies more sensitive to price shocks, drawing parallels to the cost-of-living surge following Russia’s invasion of Ukraine in 2022. The central bank reiterated its readiness to act as needed to keep inflation on track toward its 2 per cent target, emphasizing that energy markets will play a pivotal role in near-term policy decisions.
The warning comes amid a sharp spike in UK gas prices, which jumped more than 20 per cent following overnight Iranian strikes on Qatar’s Ras Laffan Industrial City, in retaliation for Israeli attacks on Iran’s South Pars gas field. Brent crude surged to nearly $120 a barrel, marking the highest level since the conflict began and a four-year peak. Analysts say such volatility has forced the Bank of England to revise its inflation projections upward for 2026, with consumer price growth now expected to reach 3.5 per cent in March and remain elevated through the autumn if energy disruptions persist.
Previously, the MPC had forecast a return to the 2 per cent inflation target by spring, aided by falling household energy bills and measures introduced in the November budget. Today, the central bank maintained its cautious economic growth projection of 0.1 to 0.2 per cent for the first quarter, while noting that short-term relief from the Ofgem price cap will provide households some insulation from the Middle East shock. Economists have warned, however, that prolonged disruptions and closure of the Strait of Hormuz—through which roughly one-fifth of the world’s oil and gas supplies pass—could push inflation above 5 per cent later this year.
Despite the uncertainty, the MPC left open the possibility of a more accommodative stance if the energy shock proves short-lived. Bailey emphasized that “interest rates would need to be less restrictive if the shock was very short-lived,” offering a degree of reassurance to consumers and investors.
Recent figures from the Office for National Statistics indicated that unemployment remained at a post-pandemic high of 5.2 per cent, while private sector wage growth came in at 3.3 per cent, below expectations. These data points underscore the delicate balance policymakers face: supporting economic growth while containing inflation amid global energy volatility.
The Bank of England’s decision aligns with similar moves by the US Federal Reserve, which held rates steady on Wednesday. Prior to the US-Israeli strikes on Iran nearly three weeks ago, central banks had been widely expected to continue lowering rates in 2026. The recent geopolitical shock, however, has increased the likelihood of rate rises both in the UK and across the eurozone, reversing expectations of continued monetary easing. UK government borrowing costs have risen over the past three weeks, reflecting the market’s reassessment of future policy in light of elevated energy prices and heightened inflation risks.
As the war in the Middle East continues, the Bank of England is sending a clear signal: while rates remain unchanged for now, prolonged conflict and energy market disruptions could force households and businesses to bear higher borrowing costs in the months ahead. The central bank’s approach underscores the interconnectedness of global geopolitics and domestic economic policy, highlighting how events thousands of miles away can ripple through UK inflation and financial markets.
