The Bank of England has sent its clearest signal yet that the rate cuts anticipated for 2025 are off the table, voting unanimously to hold at 3.75% on Thursday and warning that the Iran war’s energy price impact could push UK inflation above 3% and require rate hikes instead. The monetary policy committee’s hawkish communication effectively marked the end of the easing cycle that had been building before the conflict broke out, replacing it with a period of cautious holding and the genuine possibility of tightening. Officials warned that the war had fundamentally changed the UK’s near-term monetary policy outlook.
The clarity of the signal cuts-are-off message came through multiple channels. The committee’s unanimous hold, while expected, was accompanied by language that explicitly flagged the upside inflation risk from the war. Governor Andrew Bailey’s acknowledgement that the situation could require rate increases was more direct than his previous communications on the subject. And the revised inflation forecasts, showing price growth rising toward 3.5% in March and remaining elevated throughout 2026, made the mathematical case for why cuts had become implausible.
Bailey said the Bank was now focused on assessing how the war and its energy market consequences developed rather than on a predetermined path of rate reductions. He urged markets not to draw strong conclusions about imminent hikes while simultaneously acknowledging that the Bank was prepared to act if the inflation situation deteriorated further. The combination created a message that was hawkish in substance even as it avoided explicit commitment to action.
Financial markets had already received the clearest signal they needed. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders moved to price in a world where cuts were off the table and hikes were possible. Five-year fixed mortgage rates continued their upward march, already reflecting the changed expectations that the Bank’s communication had reinforced.
For UK households, businesses, and investors, the clearest signal yet that cuts are off the table demands a fundamental revision of financial plans. The anticipated relief from lower borrowing costs has been replaced by the prospect of rates staying higher for longer and potentially moving higher still. The Iran war has, in the space of weeks, transformed the monetary policy landscape for the UK in a way that will shape financial decisions and economic outcomes for months and possibly years to come.