The Bank of England has kept interest rates on hold at 3.75% and signalled that it could be forced to raise borrowing costs in the coming months as the US-Israel war on Iran threatens to drive UK inflation above 3%. The Monetary Policy Committee voted unanimously to maintain the base rate amid growing concern over the surge in energy prices triggered by the conflict.
Financial markets now anticipate a quarter-point increase as early as June, followed by a further rise to 4.25%, adding to pressure on household finances already strained by a cost of living crisis. The Bank stated that the 'new shock' to the economy would lead to higher than previously expected inflation in the short term.
Bank Governor Andrew Bailey said: '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 stressed that the best way to tackle this was by reopening energy supply lines and that the Bank stood 'ready to act as necessary' to ensure inflation returns to its 2% target.
Official figures published on Thursday showed UK wage growth slowed sharply in the three months to January, while unemployment remained at 5.2%, the highest in five years. Inflation was expected to fall from 3% to about 2% from April but the Bank now says it will probably rise to about 3.5% in March and remain above target throughout 2026.
Political reaction was swift, with Liberal Democrat Treasury spokesperson Daisy Cooper blaming 'Trumpflation' for forcing the Bank's hand. Some MPC members had favoured a rate cut before the war, but others, including economist Swati Dhingra, suggested borrowing costs might need to rise. Analysts warned that higher rates would add to headwinds facing the UK economy and increase pressure on the government to provide energy support for vulnerable households.
