The Bank of England has held interest rates at 3.75% but made clear it is prepared to raise them if the energy price surge driven by the Iran war proves more than temporary a striking shift in tone from a central bank that, just weeks ago, was widely expected to cut.
Governor Andrew Bailey was direct about what has changed. The war in the Middle East has pushed up energy prices, he said, and you can already feel it at the petrol pump. If it lasts, it will feed into household energy bills later in the year. The Bank now expects inflation to be close to 3.5% in March up from 3% in January and has flagged that further price rises are coming.
The vote to hold was unanimous, the first time the rate-setting committee has been fully aligned in four and a half years. That in itself is significant at February’s meeting, members were split four to five, with four backing a cut. This time, the conversation has shifted entirely. The committee discussed not just whether to hold, but whether a rate rise could be needed in the months ahead.
Financial markets have taken note. Traders are now pricing in the possibility of two rate hikes before the end of the year, which would push the rate to 4.25%. Deutsche Bank’s UK chief economist Sanjay Raja called rate hikes “a real risk for the economy,” warning that if energy prices stay where they are, the Bank could be forced to tighten policy to keep inflation in check.
Bailey pushed back on the more aggressive market expectations, cautioning against “reaching strong conclusions about raising interest rates” and urging against assuming multiple rises this year. “Today we’ve given a very clear message,” he said. “The right place to be is on hold.” But he was equally clear that the Bank “stands ready to act” if the situation demands it, and that a larger or more prolonged shock from the Middle East would require a tighter policy stance.
The only real fix, Bailey said, was restoring safe passage for shipping through the Gulf. He specifically called for the reopening of the Strait of Hormuz — the critical waterway through which a fifth of global oil supplies passes — describing it as the most appropriate and effective solution to the underlying pressure on energy prices.
The shift in rate expectations has already started working its way into the mortgage market. Fixed-rate deals have risen sharply over recent weeks, and hundreds of mortgage products have been pulled by lenders. First-time buyer Henry, who locked in a five-year deal last week after moving back home to save for a deposit, said he felt relieved to have acted when he did. “I thought I need to get this sorted,” he told the BBC, adding that rising living costs were already weighing on him. “I am going to have to have a lifestyle change, admittedly.”
The Bank of England isn’t alone in hitting pause. The US Federal Reserve held rates in the 3.5% to 3.75% range on Wednesday, and the European Central Bank kept its rate at 2% on Thursday. All three institutions are navigating the same uncomfortable tension — war-driven inflation on one side, weakening growth on the other — and all three have memories of being criticised for moving too slowly after Russia’s invasion of Ukraine. That experience is shaping how carefully they are treading this time.
Bailey said he would be “monitoring developments extremely closely” and that households and businesses should expect the Bank to respond decisively if inflation looks like it’s becoming entrenched. The message is clear enough: the era of rate cuts is, for now, on hold.
