Bank of England May Pivot to Rate Hikes as Iran Conflict Fuels Inflation Fears
The escalating military conflict between Iran and the United States, now entering its second week, has triggered a dramatic surge in global oil prices, casting a long shadow over the UK economy. Financial analysts warn that the resulting spike in energy costs could fuel a new wave of inflation, compelling the Bank of England (BoE) to pause its recent cycle of interest rate cuts and potentially even consider raising rates in the months ahead.
A Sudden Shift in Monetary Policy Expectations
Throughout 2025, the BoE's Monetary Policy Committee (MPC) implemented four successive rate cuts, reducing the base rate from a peak of 5.25% to its current level of 3.75%. This provided significant relief for mortgage holders, particularly those renewing deals originated in 2023 or later. Market consensus had pointed toward further easing, with some forecasts anticipating up to three additional cuts in 2026, potentially bringing the base rate down to 3%.
However, the geopolitical shockwaves from the Middle East have upended these predictions almost overnight. Analysts now highlight rising inflation as a paramount threat, with the BoE potentially forced to respond by tightening monetary policy. Oxford Economics now anticipates the MPC will vote to hold rates steady at its upcoming 19 March meeting, while simultaneously revising its inflation forecast upward for the latter part of the year due to anticipated higher energy bills.
Markets Signal a Dramatic Reversal
The shift in sentiment is starkly evident in financial markets. "The markets have gone from a nailed-on rate cut to virtually no chance," stated Thomas Pugh, chief economist at RSM UK. "We've gone from pricing in two rate cuts this year to almost looking like a rate rise is priced in. It's looking like the start of another inflationary shock cycle."
Pugh emphasised that the BoE's capacity to overlook such external shocks is now severely limited. "With inflation having been above-target for five years or so and looking unanchored, they just don't have the luxury of sitting back and looking through it," he told The Independent. UBS analysts concur, predicting the BoE will delay any potential cut until April at the earliest, with most MPC members opting for a hold vote in March to allow the economic picture to clarify.
Immediate Impact on Mortgages and Housing
The repercussions are already filtering through to the UK housing market. After a period of easing in 2025, mortgage rates are beginning to climb in response to shifting expectations. "Shifting interest rate expectations are already filtering through to the market, with some major lenders announcing increases to their fixed-rate products," noted Alice Haine, a finance analyst at Bestinvest.
Data from Moneyfacts shows average two- and five-year fixed mortgage deals have edged higher over the past week. Initially, increases were marginal, but lenders like TSB have implemented hikes exceeding 0.6% in a single day. This trend threatens to derail the fragile recovery in the housing market, where Halifax reported a 0.3% price increase in February, bringing the average property price to just over £301,000.
A Silver Lining for Savers
While borrowers face uncertainty, savers could stand to benefit if interest rates rise. Higher base rates typically translate to better returns on savings accounts and cash ISAs. Already, there are signs of competition intensifying among providers, with some institutions raising their rates. This development serves as a timely reminder for savers to maximise their tax-free allowances before the ISA deadline on 5 April.
The BoE's next decision on 19 March is now viewed as a critical barometer. While an immediate rate hike is considered unlikely, a firm 'hold' is the prevailing expectation, marking a decisive pause in the easing cycle. All eyes will then turn to the April meeting, where the MPC's assessment of the prolonged conflict's inflationary impact will likely determine the future path of UK interest rates and, by extension, the financial health of millions of households.
