The Bank of England has opted to hold rates at 3.75%, with the monetary policy committee (MCP) voting unanimously to keep the base rate unchanged at its March 2026 meeting.
“Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs. Prior to this, there had been continued disinflation in domestic prices and wages. CPI [consumer prices index] inflation will be higher in the near term as a result of the new shock to the economy,” the Bank said in a statement.
A series of coordinated US-Israeli strikes across Iran killed supreme leader Ayatollah Ali Khamenei on 28 February and started a conflict in the region. In response, Iran effectively closed the Strait of Hormuz, where roughly a fifth of global oil supply passes, driving fuel prices sharply higher worldwide.
This has reignited fears of prolonged energy supply disruption, leading investors to worry about a stagflation scenario, with low or negative growth and rising inflation.
“The committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices. It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term,” the BoE statement read.
Ed Hutchings, head of rates at Aviva Investors, said the pause was “not unexpected” but noted that markets have had to change course in recent weeks. A month ago, there was an 80% chance of a rate cut at this meeting, he said.
“The Iranian war has certainly made decisions far more difficult for a divided MPC, who for now are more in favour of seeing how the situation develops, giving themselves time to assess both the growth and inflation dynamics,” he said.
While it was previously expected that the UK central bank would continue down its cost-cutting path throughout the year, he noted that expectations are now that there will be “at least one hike expected later in the year”.
However, David Rees, head of global economics at Schroders, said much depends on how quickly the Iran conflict persists. “A relatively brief spike in commodity prices could still allow inflation to subside by the summer and bring rate cuts back onto the agenda later this year,” he said, while a protracted war could keep inflation above target for the foreseeable future.
Isabel Albarran, investment officer at TrinityBridge, said today’s decision “highlights the difficult balancing act” that the Bank of England faces.
Although the Bank would typically look through commodity price spikes – as these tend to be transitory – “MPC members will well remember how several ‘transitory’ waves of inflation fomented into a persistent inflation problem in 2022, and expectations are not as well-anchored at 2% as the Bank would like”, she said.
Across the pond, the US Federal Reserve yesterday opted to keep rates on pause as well at 3.5%–3.75%, balancing the risk of higher inflation caused by the Iran conflict with a weaker domestic economy.
Matthias Scheiber, head of multi-asset solutions at Allspring Global Investments, noted that job market data has weakened, as has the official GDP figures for the fourth quarter.
Meanwhile, inflation numbers have been broadly in line with expectations but he noted that “more time is needed to get inflation back to target”.
“With the increased likelihood of more fiscal spending to cushion the consumer from higher energy prices, the Fed is likely to stay data dependent and keep rates on hold,” he noted.
“Market consensus has repriced already with only one rate cut expected this year, down from three rate cuts priced in just last month.”
Seema Shah, chief global strategist at Principal Asset Management, added: “The Fed appears inclined to look through the oil price shock, retaining a bias toward further rate cuts over the next two years. Given the upward revisions to both growth and inflation, holding the median dot at one cut this year carries a distinctly dovish flavour.”