Bank of England Puts Rate Cuts on Hold as Iran War Drives Energy Prices Higher

The Bank of England was poised to start cutting interest rates. Then war broke out in Iran.

On Thursday, the central bank’s Monetary Policy Committee voted unanimously to keep its benchmark Bank Rate at 3.75%, the first time in more than four years that all nine members have backed the same outcome. The decision halted—at least for now—an expected turn toward lower borrowing costs and underscored how quickly a distant conflict can reshape Britain’s economic outlook.

The committee cited a sharp rise in global oil and gas prices since late February, when the United States and Israel launched major strikes on Iran, triggering a broader war in the Gulf and severe disruption in the Strait of Hormuz, a vital shipping route for crude and liquefied natural gas. Those moves, policymakers warned, have introduced a new “upside risk” to inflation just as price growth was finally falling back toward the Bank’s 2% target.

“We have held interest rates at 3.75% as we assess how events unfold,” Governor Andrew Bailey said in remarks carried by broadcasters after the announcement. “Whatever happens, our job is to make sure inflation gets back to its 2% target.”

The decision left millions of British households and businesses facing higher borrowing costs for longer than they had anticipated only a month ago. It also underlined a familiar, uncomfortable trade-off: a central bank determined to contain prices even as economic growth stagnates and unemployment edges higher.

From cuts in sight to a cautious hold

As recently as early February, the Bank of England appeared to be preparing the ground for a series of small rate cuts.

At its previous meeting, the Monetary Policy Committee voted 5–4 to leave Bank Rate unchanged at 3.75%, with four members favoring a quarter-point reduction to 3.5%. In its February Monetary Policy Report, the Bank projected that consumer price inflation, which stood at 3.4% in December, would ease to a little above 2% in the second quarter of 2026 as past energy spikes faded and wage pressures cooled.

“Bank Rate is likely to be reduced further” if the economy evolved as expected, the committee said at the time, signaling that the next move in rates was likely to be down.

Financial markets took the hint. Before the Iran conflict escalated on Feb. 28, investors were betting heavily on a first cut in the spring and at least two quarter-point reductions over the course of the year. Mortgage lenders, anticipating cheaper funding, had already begun trimming rates on new fixed-term deals.

The eruption of war changed those assumptions in a matter of days.

Iran war ripples through the energy market

After the initial strikes, Iran moved to severely disrupt traffic through the Strait of Hormuz, through which roughly one-fifth of the world’s seaborne crude oil normally passes. It also threatened Gulf energy infrastructure and was hit itself by attacks on facilities such as the South Pars gas field and coastal refineries.

Brent crude oil, the international benchmark, surged above $100 a barrel by early March and briefly spiked to around $126, one of the sharpest run-ups in recent years. European gas prices jumped, and analysts warned that if the conflict and disruption persisted, the shock could push inflation in many economies back up.

In Britain, the effects have already started to show. Drivers have seen fuel prices climb at the pump in recent weeks, and energy analysts now expect household gas and electricity bills to rise later in the year as higher wholesale costs feed through to the regulator’s price cap.

Chancellor of the Exchequer Rachel Reeves told reporters this month that the conflict was “likely to put upward pressure on inflation” in the months ahead. Private-sector economists estimate that the war could add around 0.3 percentage points to U.K. consumer price inflation this year. Under some scenarios in which oil and gas prices remain elevated, they say headline inflation could move back toward 5% after having fallen sharply from its double-digit peak in 2022.

Those developments forced the Bank of England to reassess its February projections that had inflation at or near target this spring and drifting below 2% later in its forecast.

A unanimous but uneasy verdict

Against that backdrop, Thursday’s 9–0 vote to keep rates on hold marked a striking shift in tone.

The dovish members who had previously argued for an immediate cut joined the majority in favoring a pause, reflecting what officials described as a need to “wait and see” how the energy shock, and the war driving it, unfold. While the full minutes of the March meeting had yet to be published at the time of the announcement, Bailey and his colleagues made clear that the risk of a renewed inflation spike outweighed the case for loosening policy now.

Financial markets interpreted the statement and Bailey’s language as a “hawkish hold.” Pricing in derivatives linked to future interest rates moved to reflect not only a delay in expected cuts but also a non-negligible chance that Bank Rate could be increased later in the year if price pressures accelerate.

“Put simply, rate hikes are now a real risk for the economy,” one economist at a major European bank said in a client note.

The decision puts the United Kingdom in step with other major central banks facing similar dilemmas. The U.S. Federal Reserve left its key policy rate unchanged on Wednesday, and Federal Reserve Chair Jerome Powell warned that the conflict had made the outlook “increasingly uncertain.” The European Central Bank also held its deposit rate steady while flagging “upside risks” to inflation and “downside risks” to growth from the Iran war and higher energy prices.

Weak growth, rising joblessness—and no relief yet

The Bank of England’s caution comes even as the domestic economy shows signs of strain.

Official data indicate that gross domestic product grew just 0.1% in the fourth quarter of 2025, and output was essentially flat at the start of this year. Business surveys point to subdued confidence, particularly in consumer-facing sectors and construction.

The labor market, which had been tight through much of the post-pandemic recovery, is loosening. Unemployment has risen to its highest rate since 2021, and wage growth has slowed. The Bank’s February forecasts projected private-sector regular pay growth easing to around 3.2% by the middle of this year, down from much stronger rates during the peak of the inflation surge.

Those indicators would normally strengthen the case for lower rates to support demand. But with energy prices rising again and headline inflation still above target, policymakers are wary of moving too quickly.

The situation has prompted some analysts to revive a term that haunted advanced economies in the 1970s: stagflation—the combination of stubborn inflation and stagnating growth. While the Bank has not used that label, its own documents acknowledge the difficult balance between guarding against “persistence” in price pressures and avoiding unnecessary damage to activity and employment.

Households and businesses brace for another squeeze

For households, the immediate effect of Thursday’s decision is that borrowing costs will remain elevated longer than many had expected.

Roughly 1.5 million mortgage holders are due to refinance this year as fixed-rate deals expire, according to past Bank of England estimates. Many had hoped to do so into a falling-rate environment. Instead, lenders that cut mortgage rates in anticipation of easier policy have begun to reverse course, pushing some deals back up as markets price out near-term cuts.

Rising energy and fuel costs add to the pressure. Lower-income households, which devote a larger share of their income to utility bills and transport, are particularly exposed. Anti-poverty groups that campaigned during the last cost-of-living crisis have warned that without targeted government support, another spike in bills could push more families into fuel poverty and arrears on rent or mortgages.

Businesses, especially in energy-intensive industries such as manufacturing and chemicals, also face a squeeze from higher input costs and tighter financial conditions. More expensive credit can weigh on investment decisions and hiring, amplifying the impact of higher energy prices on growth.

A central bank shaped by recent scars

The Bank of England’s response to the Iran-driven shock is being closely watched in part because of its recent history.

During the inflation surge that followed the COVID-19 pandemic and Russia’s invasion of Ukraine, the Bank was criticized by some lawmakers and economists for reacting too slowly to soaring prices. After initially suggesting the spike would be “transitory,” the Bank embarked on its fastest tightening cycle in decades, raising rates from near zero to 5.25% by 2023.

Those memories appear to be informing policymakers’ instincts now. Faced with another energy shock, they are signaling that they would rather err on the side of vigilance than risk a repeat of double-digit inflation and unanchored expectations.

That stance is likely to fuel renewed debate in Westminster and beyond about the limits of what monetary policy can achieve when price rises are driven by global supply disruptions rather than domestic demand. Economists across the spectrum note that higher interest rates cannot pump more oil through a blockaded strait. At the same time, they can slow wage growth and demand, helping to prevent temporary cost spikes from feeding into a broader, self-reinforcing inflationary cycle.

For now, the Bank is betting that holding rates at 3.75% will help keep that cycle in check without pushing the economy into a deep downturn. Much will depend on factors far beyond Threadneedle Street’s control: the duration of the conflict, the path of energy prices and the strength of global demand.

The next test will come not in a committee room in London, but in the Gulf. If shipping lanes reopen and oil prices fall back, the path to rate cuts in the second half of the year could reopen. If the war drags on and energy costs remain high, British households and businesses may have to live longer with the twin burdens of expensive credit and stubborn inflation.