Interest rates held at 3.75% as Bank of England
The Bank of England has held interest rates at 3.75%, signalling that borrowing costs may rise in the coming months as the economic fallout from the Iran war continues to unfold.
In a widely anticipated move, policymakers voted by a clear majority to keep rates unchanged, opting for caution amid heightened global uncertainty. The decision reflects growing concern that the conflict in the Middle East—particularly its impact on energy markets—could push inflation higher and complicate the UK’s economic outlook.
Governor Andrew Bailey described the move as an “active hold”, stressing that while rates have not increased for now, the Bank remains ready to act if inflationary pressures intensify. The central bank is closely monitoring developments linked to the war, including rising oil and gas prices, which are already feeding through into household costs and business expenses.
The ongoing conflict has disrupted global energy supplies, with oil prices surging in recent weeks. Analysts warn that prolonged instability—particularly if key supply routes remain affected—could drive inflation significantly above the Bank’s 2% target. Some projections suggest inflation could peak above 6% in a worst-case scenario, depending on how long the crisis persists.
Despite these risks, the Monetary Policy Committee stopped short of raising rates immediately. Eight members supported holding at 3.75%, while one member called for an increase, highlighting divisions over how quickly the Bank should respond to emerging inflationary pressures.
The decision marks a shift from earlier expectations that interest rates would soon begin to fall. Before the outbreak of hostilities, many economists had predicted cuts later this year as inflation appeared to be easing. However, the war has upended those forecasts, forcing policymakers to reassess both inflation and growth prospects.
Energy costs remain at the centre of the Bank’s concerns. Higher fuel and utility prices are expected to push up the cost of living for households, while also increasing operating costs for businesses. These effects could, in turn, lead to so-called “second-round” inflation, where rising wages and prices reinforce each other.
At the same time, there are signs that parts of the UK economy are weakening. Consumer confidence has softened and the labour market is showing early signs of cooling. Policymakers hope that these factors may help limit the extent to which higher energy prices translate into sustained inflation.
The Bank has outlined several possible scenarios for how the situation could evolve. In more moderate cases, inflation rises temporarily before easing. But in a more severe scenario—linked to prolonged disruption in global energy markets—price pressures could persist for years, potentially requiring more aggressive interest rate increases.
Financial markets are already reacting to the Bank’s more cautious tone. Expectations for future rate cuts have been pushed back, and some investors now anticipate that borrowing costs could rise again later this year if inflation proves more stubborn than expected.
The decision leaves households and businesses facing continued uncertainty. While holding rates steady may offer short-term relief for borrowers, the prospect of further increases remains firmly on the table.
For now, the Bank of England appears to be balancing two competing risks: tightening policy too quickly and damaging economic growth, or moving too slowly and allowing inflation to become entrenched.
As the situation in the Middle East continues to evolve, policymakers have made clear that their next move will depend on how the economic impact of the conflict unfolds—leaving the path for interest rates uncertain in the months ahead.