The Bank of England has voted to hold interest rates at 3.75 per cent, having weighed the perils of rising inflation against an underperforming economic background.
With the Iran war again pushing up the price of oil this week, higher energy bills and rising costs across food and manufacturing are likely for much of 2026, putting additional pressure on households and businesses.
The Bank’s monetary policy committee (MPC) cautioned that war in the Middle East leaves global energy costs “highly uncertain” and that inflation is likely to be higher as the year progresses. Members voted 8-1 in favour of holding rates, with one vote for an immediate hike in rates, highlighting the potential for future rises.
Interest rates were on a downward path after being cut four times last year, with early expectation being that another two cuts could follow this year as inflation headed back towards the 2 per cent target. However, the Iran war has changed all that and some experts argue that rates will need to rise again to combat the incoming inflation rise, the start of which was already evident in March’s UK economic figures, shifting up to 3.3 per cent.
Reacting to the MPC ruling, chancellor Rachel Reeves said: “The war in the Middle East is not our war, but it is one we have to respond to. Every choice I make will be about keeping costs down for families and businesses, without repeating the mistakes we’ve seen in the past that resulted in higher inflation and higher interest rates. We entered this conflict in a stronger position because of the choices this government took to build economic stability, and we are going further to take back our energy security, backing British industry and protecting households, to build a Britain that is stronger, more resilient, and prepared for the future.”
In mid-March, the MPC voted 9-0 to keep the base rate at 3.75 per cent as it waited to see both the duration and impact of the war, which was then only a couple of weeks in. Six weeks on there is no sign of a resolution, the Strait of Hormuz remains effectively closed to the passage of oil tankers and, domestically, businesses have already started to note the impact through either falling exports or needing to pass on price rises, with high street sales expected to continue lower and SMEs seeing sales growth fall to a two-year low, according to the latest release of Xero’s Small Business Index.
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The Bank’s analysis shows that households expect an inflationary hit this year and may already have reigned in spending with increased sensitivity to price changes. And while a worst-case scenario of prolonged conflict could tip inflation towards six per cent in the months following a war resolution, the Bank notes that a looser labour market after rising unemployment can restrict the worst of inflationary pressures. The UK has had rising unemployment recently, hitting 5 per cent at the start of the year, meaning works could have less power to earn salary rises and firms then more readily have spare capacity to absorb some cost increases.
Governor Andrew Bailey said the Bank was monitoring the “impact on the UK economy very closely”.
Sir Mel Stride, the shadow chancellor, said: “Rachel Reeves has weakened our economy and left us vulnerable in the run-up to the latest energy crisis. The conflict in the Middle East is pushing up prices – but the UK already had the highest inflation in the G7 thanks to Labour’s choices. Tax hikes, reckless spending and disastrous energy policies have paved the way for high inflation and interest rates staying higher for longer. We need a different approach: cutting the benefits bill, lowering taxes and drilling in the North Sea. We need to get Britain working again.”
Several research groups have expressed doubt about any potential benefit of additional North Sea drilling to energy prices in the UK. And one of the UK’s leading think tanks has called on the government to cap energy costs for the short term, while also pushing for a renewed focus on green energy.
“While the Bank held rates constant, they have clearly stated that the situation could get worse before it gets better. If energy markets do not improve very quickly, they will likely raise rates and keep them higher for longer – hitting growth and hurting households,” said Carsten Jung, associate director at the IPPR. “The government is not powerless in this. Temporarily capping energy costs can limit inflation increases and can be cheaper than being hit by big second-round effects and having to clean up a recession later. As these shocks become more frequent in a more volatile world, reducing our reliance on fossil fuels is the smart move to protect the economy moving forward.”
Some mortgage lenders have reduced rates over the past week or two, as swap rates fell back slightly following sharp rises in the early weeks of the war, which led to the best deals being pulled. However, even with the base rate held, it remains unlikely that a huge range of low-cost mortgages will make a comeback soon. Markets are still pricing in up to three interest rate hikes and, even if that number does not materialise in Bank of England terms, high street banks still price their products off those figures.
For savers, however, it should be good news, with several financial institutions still offering good rates well above 4 per cent – and one expert thinks they could yet go higher.
“To keep the value of your savings intact, it pays to shop around. The good news is that there are lots of inflation-beating options available,” said Finder’s Kate Steere, personal finance expert. “I’d urge savers to avoid tying themselves into a fixed deal at the moment. Instead, check out the top easy access options and set a reminder to review your accounts in a few months, when any upward movement in the base rate may well be reflected in even more competitive savings rates.”
The National Debtline service says it is seeing initial signs of concern among callers, which indicate cost of living worries. “A hold in interest rates won’t bring immediate relief to many households,” said head of debt advice communications, Grace Brownfield. “While we haven’t yet seen a rise in mortgage arrears among people contacting National Debtline, we are seeing more people struggling with everyday costs, particularly energy bills and credit cards.
“These are often the first warning signs of wider financial difficulty, especially for households already under pressure from higher prices and stagnant incomes.”
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