The Bank of England held interest rates steady at 3.75% on Thursday but moved to put markets and the public on notice that higher borrowing costs could arrive as early as June if energy prices continue to rise following the outbreak of war involving the United States, Israel, and Iran. The monetary policy committee voted unanimously to hold, but the tone of the accompanying statement was markedly more cautious than in recent months. Officials described the conflict as a significant new shock to the UK’s economic outlook.
Energy markets have been sharply disrupted by the war, with oil and gas prices rising in ways that directly threaten the UK’s inflation trajectory. The Bank had expected inflation to fall toward 2% around April, but now projects it could rise to approximately 3.5% in March and remain above target well into 2026. This is a significant reversal that has fundamentally altered the policy debate within the committee.
Governor Bailey said the war’s effects were already evident at UK petrol stations and warned that the impact could spread to household energy bills if supply disruptions persist. He said the Bank stood ready to act but was choosing to wait and assess the developing situation. His comments attempted to strike a balance between transparency and avoiding unnecessary market panic.
Despite the cautious messaging, traders interpreted the Bank’s statement as a clear hawkish signal, increasing bets on rate hikes in June and again before year end. UK gilt yields rose and the FTSE 100 fell as markets adjusted. Some analysts noted that five-year fixed mortgage rates had already moved to their highest levels since early 2025.
Internal committee dynamics are shifting, with previously dovish members indicating a potential change in stance. Swati Dhingra and others who had been consistent advocates for rate cuts suggested that persistent inflation could justify tightening. The Bank’s next decision will come against a backdrop of ongoing geopolitical uncertainty and closely watched inflation data.