The Bank of England’s decision to hold rates at 3.75% on Thursday, while warning of potential rate hikes driven by the Iran war, has tightened the financial screw on UK households already dealing with elevated costs. The monetary policy committee voted unanimously to hold, but signalled that the energy price shock triggered by the US-Israel conflict against Iran could force borrowing cost increases in the months ahead. For British families facing higher petrol bills and potentially steeper energy costs, the announcement offered little reassurance.
The war’s impact on the UK economy is being felt primarily through global energy markets. Oil and gas prices have risen sharply since hostilities began, threatening to push UK inflation back above 3% at a time when consumers had been hoping for relief. The Bank now expects inflation to rise to approximately 3.5% in March and remain well above its 2% target throughout 2026.
Governor Andrew Bailey said the Bank was monitoring the situation with care and would not allow inflation to become entrenched. He pointed to higher petrol prices as a visible early consequence of the war’s energy market disruption and warned that household bills could follow later in the year. While urging markets to avoid overreacting, he left the door open to rate action if conditions demanded it.
Financial markets were not reassured by the governor’s measured tone. UK gilt yields rose, the FTSE 100 fell, and the pound gained against the dollar as traders increased their bets on rate hikes in June and later in the year. Five-year fixed mortgage rates were reported to have reached their highest levels since early 2025, according to analysts.
The government is under pressure from multiple directions: rising borrowing costs, a potentially slowing economy, and the threat of higher energy bills. Opposition politicians have blamed international trade policies and their domestic political advocates for driving up costs for ordinary people. Chancellor Reeves is reportedly exploring ways to provide targeted support for the most vulnerable households as the Bank’s rate path becomes less predictable.