The Bank of England has signalled its readiness to act to protect UK price stability after the outbreak of the US-Israel war against Iran threatened to push inflation above 3% and reverse the progress made toward the 2% target. The monetary policy committee voted unanimously to hold rates at 3.75% on Thursday, but the Bank’s language made clear that it was prepared to raise borrowing costs if the inflation outlook continued to deteriorate. The decision was widely expected, but the hawkish framing was more forceful than many analysts had anticipated.
The Iran conflict has had a rapid and significant impact on global energy markets, sending oil and gas prices sharply higher in the weeks since hostilities began. For the UK, which had been on track to achieve near-target inflation by April, the shock represents a serious setback. The Bank now projects inflation rising to approximately 3.5% in March and staying above its 2% target well into 2026.
Governor Andrew Bailey said the Bank would use every tool available to ensure that the external shock did not translate into persistent domestic inflation. He acknowledged the visible impact of the war through rising petrol prices and warned that household energy bills could follow if supply disruption continues. His message was firm on the inflation target but cautious about committing to specific future actions.
Markets reacted with a clear hawkish interpretation. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders repriced the UK interest rate outlook. Financial markets now anticipate a rate hike in June, with some forecasters predicting a second before year end. Mortgage rate expectations have already shifted materially.
Within the Bank, opinion has evolved in response to the war. Members who had been considering rate cuts have moved to a cautious hold position, while others have explicitly raised the possibility of tightening. The internal debate reflects the genuine uncertainty about how long the conflict will last and how persistently it will affect UK prices.