The Bank of England delivered a hawkish message on Thursday, holding its key rate at 3.75% while sending a clear signal to financial markets that June could be a live meeting for a rate increase if the energy shock from the Iran war continues to fuel UK inflation. The monetary policy committee voted unanimously to hold, with Governor Andrew Bailey explicitly warning that rising oil and gas prices driven by the US-Israel conflict against Iran could push inflation above 3% and require a policy response. The decision marks a decisive end to the anticipated rate-cutting cycle for the near term.
The hawkish turn reflects the changed inflation outlook created by the Iran war. Before hostilities began, the Bank had been moving toward a rate reduction, encouraged by cooling inflation and a softening labour market. The conflict has disrupted that process by driving energy prices sharply higher and introducing a new upside risk to inflation. The Bank now projects inflation reaching approximately 3.5% in March and remaining above its 2% target well into 2026.
Governor Bailey said the Bank was closely watching how the situation in the Middle East evolved and what it meant for UK energy prices. He acknowledged the early impact on petrol prices and warned of potential knock-on effects for household energy bills. His message to markets was one of vigilance — the Bank was not on a predetermined hiking path, but it was not complacent about the inflation risk either.
Markets took the hint. UK gilt yields rose, the FTSE 100 fell, and the pound gained against the dollar as traders increased their bets on rate hikes ahead. Financial markets are now pricing in a June hike as the most likely timing for the first move, with a second potential increase before December widely anticipated.
MPC members who had previously been dovish have shifted their positions in response to the war. Swati Dhingra and others who had consistently advocated for rate cuts acknowledged that the energy price shock had changed the calculus. For UK households, this hawkish shift means higher borrowing costs at a time when energy bills may also be heading upward — a double financial squeeze that could define the economic experience of 2025.