The Bank of England resisted calls to cut interest rates on Thursday, maintaining its base rate at 3.75% as the ongoing conflict between the United States, Israel, and Iran continues to push global energy prices higher. The unanimous decision reflected consensus that the inflationary risks posed by the war outweighed the case for monetary easing. Policymakers warned that inflation could exceed 3% and that rate hikes may become necessary before the year is out.
The war’s impact on energy markets has been swift and significant, with oil prices rising sharply since hostilities began. This threatens to undo months of progress in bringing UK inflation down toward the Bank’s 2% target. Analysts now expect inflation to remain above target throughout 2026, representing a meaningful setback for the Bank’s policy goals.
Governor Andrew Bailey pointed to rising petrol prices as evidence that the shock was already being felt in the real economy. He warned that household energy bills could climb later in 2025 if energy supply disruptions continue. His message to the public was one of vigilance, promising that the Bank would do whatever it takes to return inflation to target.
Markets reacted sharply to the hawkish undertone of the Bank’s statement, pricing in two quarter-point rate hikes before December. UK sovereign bond yields rose as investors adjusted their expectations, and the FTSE 100 fell in response. The pound’s rise against the dollar reflected improved rate expectations relative to the US.
The government faces a politically uncomfortable situation, with rising mortgage costs and higher energy bills threatening to squeeze households already under financial strain. The Liberal Democrats were quick to attack, blaming international trade policies and domestic political figures for driving costs higher. Chancellor Rachel Reeves faces growing pressure to introduce targeted support for the most vulnerable.