A conflict thousands of miles from Britain has dramatically changed the Bank of England’s outlook, prompting a unanimous decision to hold rates at 3.75% while warning that hikes may be necessary in the coming months. The US-Israel war against Iran has driven up global energy prices and threatened to push UK inflation above 3%, reversing what had appeared to be steady progress toward the Bank’s 2% target. Governor Andrew Bailey said the Bank was in a watching brief, ready to act but not yet compelled to move.
The UK had appeared to be entering a period of monetary easing, with inflation cooling and the labour market softening. Those conditions would typically have justified a rate cut. Instead, the Bank finds itself considering the opposite — a tightening cycle prompted not by domestic conditions but by geopolitical events far beyond its control.
Bailey acknowledged the real-world impact of the energy shock, pointing to visible price rises at petrol stations as an early indicator of what may be to come. He warned that sustained disruption to energy supply chains could flow through to household bills by the latter half of 2025. The Bank made clear it was not prepared to allow this to become entrenched inflation.
Markets moved decisively after the announcement, with City traders pricing in a June rate hike followed by a further increase by year end. UK government borrowing costs rose as bond yields adjusted to reflect the changed outlook. The FTSE 100 declined as investor optimism faded.
The political dimension is significant. Labour’s economic plan had been built on a foundation of falling interest rates, and rising borrowing costs pose a direct challenge to that strategy. Opposition politicians used the occasion to point the finger at trade-related inflation and its domestic political champions. The chancellor faces pressure to cushion households from what may be a difficult few months ahead.