The Bank of England’s rate-cutting course has been reversed by the Iran war, with the monetary policy committee voting unanimously to hold at 3.75% on Thursday and signalling that borrowing costs could rise rather than fall in the months ahead. The US-Israel conflict against Iran has sent global energy prices sharply higher and threatened to push UK inflation above 3%, transforming the policy environment from one oriented toward easing to one that could require tightening. Officials warned that the conflict represented a significant new shock to the UK economy.
The reversal has been rapid and dramatic. Just weeks before the conflict broke out, markets had been pricing in a rate cut at Thursday’s meeting, reflecting cooling inflation and a softening labour market. The war has completely changed that calculus, replacing confidence in a return to 2% inflation with concern about a new inflation spike driven by energy costs. The Bank now projects inflation rising toward 3.5% in March and remaining elevated throughout 2026.
Governor Andrew Bailey said the Bank had moved from a cutting orientation to a careful holding brief as it assessed the war’s economic consequences. He warned that rising petrol prices were an early indicator of the shock and said the potential for higher household energy bills meant the situation could worsen before it improved. The Bank stood ready to act but was choosing to wait for more clarity before moving.
Markets were not prepared to wait with the Bank. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders priced in June and year-end rate hikes. Analysts noted that the reversal in expectations was one of the sharpest seen in recent years, reflecting the scale of the shock delivered by the Iran war to UK monetary policy planning.
The human consequence of the reversal is felt most acutely by the millions of UK homeowners and borrowers who had been anticipating relief from lower mortgage rates. That relief has now been delayed indefinitely and replaced by the risk of higher costs. The government faces the challenge of managing household expectations in an environment where the economic script has been fundamentally rewritten by geopolitical events beyond its control.