Policymakers at the Bank of England kept interest rates unchanged at 3.75% on Thursday, acknowledging the disruption caused by the Middle East conflict but stopping short of any immediate tightening. The decision was unanimous and widely anticipated, reflecting the committee’s preference for caution in the face of fast-moving geopolitical events. However, the Bank’s accompanying signals left markets with little doubt that borrowing cost increases are firmly on the table for the months ahead.
The US-Israel operation against Iran has been the defining external shock for the UK economy in recent weeks, sending energy prices sharply higher and threatening to derail the disinflation process. The Bank had previously expected inflation to approach the 2% target by April, but now sees it rising toward 3.5% in the near term and staying elevated well into next year. This shift in the inflation outlook has fundamentally changed the policy discussion within Threadneedle Street.
Governor Andrew Bailey used his post-decision briefing to draw a direct line between the war and rising prices at UK petrol stations. He said the path to lower inflation ran through restoring energy supply lines disrupted by the conflict, not through rate policy alone. The Bank would use its monetary tools only to the extent necessary to keep inflation anchored.
Financial markets responded to the hawkish tone by increasing bets on June and year-end rate hikes. UK government bond yields climbed and the FTSE 100 fell in early trading following the announcement. Five-year fixed mortgage rates continued their upward trend, reaching levels not seen since early 2025.
Several MPC members acknowledged a meaningful shift in their thinking following the war’s outbreak. Those who had been considering rate cuts before the conflict have moved to a wait-and-see position, while others have openly discussed the possibility of hikes. The Bank’s next policy meeting will be watched closely for signs of which direction the majority is leaning.