The Bank of England’s inflation target is under threat from the ongoing war in the Middle East, and the institution’s response on Thursday was to freeze rates at 3.75% while warning that the US-Israel conflict against Iran could force borrowing cost increases in the months ahead. The monetary policy committee voted unanimously to hold, but described the conflict as a new and significant shock that had altered the UK’s near-term economic outlook. Officials said inflation could rise above 3%, well above the Bank’s 2% target.
The threat to the inflation target comes directly from the war’s impact on global energy markets. Oil and gas prices have surged since the conflict began, threatening to reverse the progress that had been made in bringing UK inflation under control. The Bank now expects inflation to rise to approximately 3.5% in March and remain above target throughout 2026, a material deterioration in the outlook compared to pre-war forecasts.
Governor Andrew Bailey said the Bank was not prepared to allow the energy price shock to undermine its inflation mandate. He acknowledged the early impact on petrol prices and warned of the potential for higher household energy bills later in the year. While emphasising a preference for holding and monitoring, he made clear the Bank retained both the will and the means to act if necessary.
Financial markets interpreted the Bank’s statement as more hawkish than neutral, pushing UK gilt yields higher and sending the FTSE 100 lower. The pound gained against the dollar following the announcement. Analysts moved their forecasts for the first rate hike to as early as June, with a second potential move before December.
Several MPC members who had been considering rate cuts before the war changed course following the conflict’s outbreak. Even Swati Dhingra, previously the most consistent advocate for lower rates, acknowledged the changed environment and suggested that tightening could be warranted if inflation persisted. The Bank’s next meeting will be a key test of how far opinion on the committee has shifted.