The Bank of England has left interest rates unchanged at 3.75%, warning that the US-Israel conflict with Iran could push UK inflation above 3% in the coming months. The Monetary Policy Committee voted unanimously to hold the base rate, citing a surge in energy prices triggered by the war.
Financial markets now anticipate two quarter-point rate rises this year, potentially starting in June, which would take the base rate to 4.25%. The pound rose against the dollar after the decision, while UK government borrowing costs increased and the FTSE 100 fell.
Bank Governor Andrew Bailey said the Middle East conflict had pushed up global energy prices, which would feed into higher household bills later this year. However, he cautioned against assuming multiple rate rises, stating that the right place for now was to remain on hold.
The Bank warned that inflation, currently at 3%, could rise to 3.5% in March and stay above its 2% target throughout 2026. This contrasts with earlier expectations of a decline to around 2% from April, partly due to government measures to reduce energy bills.
Some MPC members, including deputy governors Sarah Breeden and Dave Ramsden, would have preferred a rate cut before the war, but others, such as Swati Dhingra, indicated that borrowing costs might need to rise if the inflation shock persists. External member Megan Greene noted that households and businesses could be more sensitive to rising inflation after years of above-target price growth.
Critics, including Liberal Democrat Treasury spokesperson Daisy Cooper, blamed the global situation for higher mortgage costs. Analysts warned that higher borrowing costs would add to economic headwinds, with five-year fixed mortgage rates reaching their highest levels since early 2025.
