The Bank of England left interest rates unchanged at 3.75% on Thursday but put financial markets on notice that increases could follow if the war in the Middle East continues to fuel inflation. All nine members of the monetary policy committee voted in favour of holding rates. The decision came on the same day that official data showed UK unemployment had climbed to 5.2%, its highest point in five years.
The war involving the United States, Israel, and Iran has sent shockwaves through global energy markets, pushing up oil and gas prices at a time when the UK was close to achieving its 2% inflation target. The Bank now expects inflation to climb back above 3%, complicating the outlook for rate cuts that had been widely expected earlier this year. Officials described the conflict as an unwelcome external shock to an already fragile economic environment.
Governor Andrew Bailey made clear that the Bank would not hesitate to raise rates if inflation expectations became unanchored. He said the effects of rising energy costs were already being felt by drivers at petrol forecourts across the country. If the disruption to global energy supply persists, the Bank warned that household bills could rise sharply in the second half of the year.
Markets moved quickly to price in two potential rate hikes before the end of 2025, with the first expected as soon as June. UK government bond yields rose following the decision, reflecting investor expectations of tighter monetary policy ahead. The FTSE 100 fell as higher borrowing costs weighed on investor sentiment.
Despite market speculation, Bailey was careful to push back against assumptions that rate rises were imminent or certain. He stressed the importance of waiting to assess how the conflict and its economic consequences develop before making any policy moves. For now, the Bank has chosen patience — but its message was unmistakably hawkish.