The Bank of England’s decision to hold interest rates at 3.75% has done little to ease the pressure on UK families, who now face the twin threats of rising energy costs driven by the Iran war and the prospect of higher mortgage rates if the Bank is forced to act. The monetary policy committee voted unanimously to hold, but warned that the ongoing conflict between the United States, Israel, and Iran has created an inflation risk that could force rate increases in the months ahead. For households already stretched by years of cost-of-living pressures, the message was sobering.
The war has pushed global energy prices higher in ways that directly threaten the progress the UK had been making on inflation. The Bank had expected inflation to approach the 2% target around April, but has revised that forecast upward significantly, now projecting inflation to reach around 3.5% in March and remain elevated throughout 2026. These revisions have shifted the policy debate within the committee from cuts to potential hikes.
Governor Andrew Bailey acknowledged the real-world impact on UK families, pointing to higher petrol prices as the most visible early indicator. He warned that if supply disruptions continue, household energy bills could climb sharply later in the year. The Bank would monitor developments carefully, he said, and would not hesitate to act if the inflation situation deteriorated further.
Financial markets have already begun to price in the new reality. UK government borrowing costs rose following the Bank’s announcement, and the FTSE 100 fell as investors adjusted their outlooks. Traders now widely expect a quarter-point rate hike in June, with some predicting a second before year end. Five-year fixed mortgage rates have already moved to their highest levels since early 2025.
The government is under increasing pressure to provide support to households most exposed to rising energy and mortgage costs. Chancellor Rachel Reeves is reportedly considering targeted assistance, but the fiscal room to manoeuvre is constrained. The coming months represent a genuine test for both the Bank and the government in managing the economic fallout of a geopolitical crisis beyond their control.