The Bank of England has kept interest rates on hold at 3.75%, signalling that a rise could be necessary in the coming months due to the inflationary impact of the US-Israel war on Iran. The Monetary Policy Committee voted unanimously to maintain the base rate, citing concerns over surging energy prices triggered by the conflict.
The decision caused the pound to strengthen against the US dollar, while UK government borrowing costs rose and the FTSE 100 fell. Financial markets now anticipate a quarter-point increase as early as June, with a further rise to 4.25% later in the year, adding pressure on household finances already strained by the cost of living crisis.
Bank Governor Andrew Bailey stated: 'War in the Middle East has pushed up global energy prices. You can already see that at the petrol pump and if it lasts it will feed into higher household energy bills later in the year.' He emphasised that the Bank stands 'ready to act as necessary' to ensure inflation returns to its 2% target.
Official figures released on Thursday showed UK wage growth slowed sharply in the three months to January, while unemployment remained at 5.2%, the highest level in five years. The Bank now expects inflation to rise to around 3.5% in March and remain above 2% throughout 2026.
Liberal Democrat Treasury spokesperson Daisy Cooper blamed 'Trumpflation' for forcing the Bank into a corner, while analysts warned that higher borrowing costs would further hinder the government's growth strategy. Kathleen Brooks of XTB noted that five-year fixed mortgage rates are hitting their highest levels since early 2025.
