Bank holds UK interest rates at 3.75% and stands ‘ready to act’ over Iran war

Danni Hewson, head of financial analysis at AJ Bell, said: “The last time the Bank of England’s MPC members voted unanimously was during the Covid pandemic, and today’s decision once again illustrates the impact global instability can have on the UK economy.

“A few weeks ago, inflation had been expected to fall back to the Bank’s 2% target this spring. Now rising energy prices are already being felt by the consumer, with the cost of filling up at the pump the first indication of what could become a significant economic shock.

“Households are acutely aware of the impact rising inflation can have on living standards and headlines about today’s significant oil price jump could undermine confidence and push people to pad out their emergency funds rather than splurge on a new sofa or meal out.

“Whilst central banks can’t influence energy prices, they do have the power to nudge the economy through increased borrowing costs which seek to prevent the kind of inflation busting pay rises that workers were demanding during the last inflationary cycle.

“There has been criticism that the Bank of England didn’t act quickly enough to stop the secondary impact of the last energy price shock, though it was the first major central bank to begin to tighten policy. But the economic climate in 2026 is very different from the one in 2021, when the country was powering back up after a series of lockdowns and post pandemic hiring was still racing towards its peak.

“Governor Andrew Bailey said the Bank stands ‘ready to act’, with MPC members in agreement that the next six weeks could shed light on the scale and likely duration of the conflict.

“Lenders have already started to make moves and mortgage rates have been ticking up. Markets are now pricing in an almost 50% chance that April’s meeting will see rates rise to 4% with the potential for two additional rate hikes by the end of the year.

“But no one has a crystal ball. No one knows how long the conflict will last or the amount of damage that could be inflicted on crucial energy infrastructure by the time it ends.”