Bank of England Holds Rates as Middle East War Drives Oil Above $100

War in the Gulf closed in on the Bank of England this week.

Rates on hold as energy shock upends outlook

The central bank held its benchmark interest rate at 3.75% after a meeting that ended March 18, breaking off a months-long drift toward lower borrowing costs as an escalating conflict involving Iran sent global oil and gas prices sharply higher.

In minutes published March 19, the Monetary Policy Committee (MPC) said the “main development” since its previous meeting in early February was “the outbreak of conflict between Israel and the United States, and Iran,” which has spread across the Middle East and targeted energy infrastructure and shipping.

The decision was unanimous. All nine MPC members voted to keep Bank Rate unchanged, a notable shift from February, when four had pushed for a cut to 3.5%. That rare unity underscores how seriously policymakers view the energy shock triggered by fighting around the Strait of Hormuz, a critical chokepoint for global crude and liquefied natural gas shipments.

Hormuz disruption pushes fuel costs higher

The minutes describe shipping through the narrow waterway—which normally carries around one-fifth of global oil and LNG flows—as having “almost ground to a halt” after Iranian attacks. As a result, the Bank said, there has been “a significant increase in global energy and other commodity prices,” which will feed through to household fuel and utility bills and raise costs for businesses.

Brent crude has traded above $100 a barrel in recent days, around 60% higher than before the conflict and the highest level since 2022. Benchmark European gas prices are up by a similar margin, while UK gas futures for later this year have risen by 35% to 40%, levels that typically help set the path for future Ofgem price caps.

The Bank of England stressed that while it cannot influence those global prices, it must manage how the shock ripples through the domestic economy.

“Monetary policy cannot prevent or offset the impact of fluctuations in global energy prices on UK inflation in the short term,” the committee said. “It can, however, ensure that the economic adjustment to those movements is consistent with inflation returning to the 2% target sustainably in the medium term.”

Inflation risks return as policymakers warn of second-round effects

Officials cautioned that the latest jump in energy costs is likely to push consumer price inflation higher in the near term, reversing some of the disinflation seen over the winter. UK headline inflation slowed to around 3% in January and February, down from 3.4% in December and well below the double-digit rates recorded in 2022 and 2023, but still above the Bank’s 2% goal.

Before the war, the February Monetary Policy Report projected inflation would fall close to target around the second quarter of this year. That trajectory is now in doubt. The minutes say members are “alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting” as households and firms react to higher bills.

Governor Andrew Bailey argued in the discussion that the latest moves in oil and gas prices “are outside the control of UK monetary policy” and depend on restoring safe passage through the Strait of Hormuz, according to the published record. But he and colleagues also pointed to the risk that if the disruption is prolonged—and if workers and companies come to see higher prices as lasting—inflation expectations could drift up again.

Dovish members shift as outlook becomes “a crossroads”

Some of the MPC’s more dovish members made clear how much the conflict had changed their stance.

Deputy Governor Sarah Breeden and Deputy Governor Dave Ramsden both indicated they would have voted for another rate cut in March, as they did in February, had it not been for the new energy shock and the uncertainty around it. Swati Dhingra, an external member, described the outlook as being “at a crossroads,” laying out one path in which a modest, temporary energy spike merely slows the decline in inflation, and another in which a severe and persistent supply shock forces the committee to hold or even raise rates to keep expectations anchored.

The International Energy Agency has called the closure of Hormuz and associated attacks on infrastructure the “largest supply disruption in the history of the global oil market” and coordinated a release of around 400 million barrels from emergency reserves, the biggest in its history. The Bank of England noted that such releases would only “partially offset” lost supply and would take weeks to reach refineries and consumers.

Cost-of-living pressures threaten fragile growth

For the UK, a net energy importer, the shock threatens to reopen wounds from the recent cost-of-living crisis. Wholesale price rises are already feeding into projections for household bills later this year. Analysts now expect the Ofgem price cap on a typical dual-fuel direct-debit household to climb in the July–September quarter to roughly £1,900 to £2,000 a year—an increase of around £200 to £300 from current levels.

That squeeze would hit low-income households hardest, as they spend a larger share of income on heating, electricity and food. It would also leave less money for discretionary spending, weighing on sectors such as retail and hospitality just as official data show economic growth running at essentially zero.

The Office for National Statistics estimates that gross domestic product was flat in January and grew 0.2% in the three months to January, indicating a fragile recovery even before the war. The MPC reiterated that higher energy prices are likely to “weigh on economic activity” by eroding real incomes and dampening demand.

Markets tighten as yields climb

Financial markets have reacted nervously. Yields on 10-year UK government bonds have climbed to around 5% in recent weeks, the highest since the 2008 financial crisis, reflecting both a global bond sell-off and concerns over the UK’s sensitivity to imported energy prices and already-high public debt.

The sterling exchange rate, by contrast, has been little changed on a trade-weighted basis, suggesting that tighter financial conditions are coming primarily through higher market interest rates rather than currency weakness.

What the Bank may do next

The committee set out conditional paths for policy from here. If the energy shock proves larger and more prolonged than markets currently expect—and if there are clear signs of second-round effects in wages and prices—“monetary policy might need to be kept more restrictive for longer,” the minutes said. If, instead, the conflict is short-lived and slack in the economy widens, there could be scope for “less restrictive” policy, implying faster or deeper rate cuts later on.

For now, the MPC signaled it will watch the Middle East and the data closely ahead of its next scheduled meeting in May.

“The Committee will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole,” the minutes concluded. “It stands ready to adjust monetary policy as necessary to return inflation to the 2% target sustainably.”

That leaves British households and businesses facing a renewed bout of uncertainty: a war-driven jump in energy costs, a central bank unwilling to declare victory over inflation, and an economy that has little momentum to spare if the shock lasts longer than hoped.