Britain’s central bank has opted to maintain its interest rate at 3.75%, pausing any monetary easing as the war involving the US, Israel, and Iran continues to shake global energy markets. The monetary policy committee reached a unanimous decision to hold, marking a significant shift from earlier expectations of a rate cut. Policymakers flagged the conflict as a “new shock” that could complicate the UK’s inflation outlook for months ahead.
Prior to the outbreak of hostilities, markets had widely anticipated a reduction in borrowing costs, driven by signs of cooling inflation and a slowing labour market. The war changed that calculus entirely, sending oil and gas prices sharply higher and threatening to reverse the progress made in bringing inflation down. The Bank now expects headline inflation to rise to around 3.5% in March before remaining elevated well into 2026.
Governor Andrew Bailey acknowledged the difficult position facing both households and policymakers. He stated that reopening energy supply lines disrupted by the conflict was the most effective solution to the inflation threat. The Bank signalled it stood ready to act if inflation remained persistently above target.
Some MPC members, including deputy governors Sarah Breeden and Dave Ramsden, indicated they would have voted for a cut had the war not broken out. Economist Swati Dhingra, previously one of the most vocal advocates for lower rates, suggested borrowing costs might now need to rise. This marked a notable shift in tone from one of the committee’s most dovish voices.
The political fallout was immediate, with the Liberal Democrats blaming both domestic and international political figures for driving up costs. Analyst Kathleen Brooks described rising mortgage rates as damaging to the government’s growth plans. Chancellor Rachel Reeves was said to be exploring energy support options to shield the most vulnerable from the coming financial strain.