Bank of England presses pause on interest rates as Iran worries grow

The Bank of England held interest rates at 3.75 per cent today, a sign of its nervousness about what the war in Iran could do to inflation.

Before the US bombed Iran, the widespread City assumption was that the Bank would lower interest rates, believing that inflation is under control and that unemployment is becoming a worry.

By lowering borrowing costs it hoped to help out those taking out mortgages and encourage businesses to hire.

Instead today it played it safe – with a unanimous vote underlining the uncertain nature of the current climate.

The Bank’s Monetary Policy Committee (MPC), a nine-strong band of economics experts overseen by Bank Governor Andrew Bailey, cut rates four times in 2025.

In Thursday’s minutes, the MPC sought to explain why holding is the safest course of action while the wider geopolitical landscape continues to unfold.

“Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs. Prior to this, there had been continued disinflation in domestic prices and wages. CPI inflation will be higher in the near term as a result of the new shock to the economy,” the report read.

“The Committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices. It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.”

City analysts, including those at Goldman Sachs, still think it will cut rates two or three times this year, but the spike in oil and gas prices since the war started has given it pause for thought.

The wait-and-see approach may be followed by other central banks around the world.

Philip Shaw at Investec said: “The Bank of England’s decision to keep interest rates unchanged is really no surprise at all. A month ago, there had been speculation over a possible cut, but the hostilities with Iran have caused a surge in oil and gas prices which will be inflationary if sustained. We would not rule out reductions in rates later this year but first we need to see an end to the Iranian conflict and energy prices begin to come back down again as evidence that the UK is not staring a period of higher inflation in the face.”

In the UK, government bond yields have spiked sending the cost of new mortgages higher. There has been some talk of “fuel rationing” but experts say that is unlikely, since the UK can and does import oil and gas from America and Norway.

Economists now expect the Bank of England to sit tight on rates until at least the summer, to check that inflation does not get out of hand.

It, and global markets, are mostly betting that the Iran conflict will soon be over and that the cost of oil will fall, reducing the inflationary threat.

When oil prices hit their peak last week, some began speculating that the next move in rates might be up rather than down.

Peter Goves at MFS Investment Management, doubts that. He says: “Depending on the magnitude and duration of the shock, the Bank of England could resume cutting but only later on in the year. We struggle with the idea the Bank of England can or will hike any time soon, which will largely weigh on an already delicate demand backdrop.”

City economists still think Bank base rate will end the year at 3 per cent. But that does assume that inflation doesn’t defy expectations and rise above its present 3 per cent.

The Bank of England’s official target for inflation is 2 per cent.

Paul Dales at Capital Economics said: “Just a couple of weeks ago it looked as though the Bank’s Monetary Policy Committee (MPC) was nailed on to cut interest rates to 3.50 per cent. What’s more, at the previous policy meeting in February Governor Bailey said ‘I don’t want to endorse 3.25 per cent, but it is a reasonable market curve’.”

Andrew Lloyd, Managing Director at national property firm, Search Acumen, says:

“The decline in interest rates over the past 18 months has been welcome, but today’s decision to wait and hold signals to markets to do the same. This will still hit consumer’s pockets, pressing pause on the immediate need for both domestic investor spending and affordable mortgage rates as banks pull mortgages like it’s Truss 2.0. There is an argument that after property tax reform last year dampened buyer spirits and the final fade-out of COVID-era cheap borrowing, home movers need more reasons to make their move, not less.”