The Iran war puts the brakes on next Bank of England rate cut
A road closure sign leans against a wall outside the Royal Exchange in the heart of the City of London on June 13, 2022 in London, England.
Richard Baker | In pictures | Getty Images
Before the war in Iran broke out, it was widely predicted that the Bank of England would be on track to cut interest rates at its meeting next week.
However, economists estimate that the turmoil that surrounded the Middle East with the US and Israel’s attack on leading oil producer Iran and the escalation of the war put the brakes on the interest rate cut in March.
“BoE cuts are possible in the first half of 2026, but March is off the table and April requires a clear calming of geopolitical tensions,” JPMorgan’s chief UK economist Allan Monks said in an emailed analysis. he said.
“We are postponing the next cut to April for now, but risks are already shifting towards a longer pause and larger growth impact,” he added.
Economists were confident that the MPC, the central bank’s policy-making committee, would look to cut interest rates to boost the British economy amid weak growth, a weakening employment market and a downward trend in inflation.
A worker looks at the weather deck of the Armada gas condensate platform operated by BG Group Plc, off the coast of Aberdeen, UK, in the North Sea
Simon Dawson | Bloomberg | Getty Images
The war damaged oil and gas infrastructure and led to the effective closure of the Strait of Hormuz maritime corridor, endangering global supplies and causing energy prices to rise.
UBS Investment Bank European economist Anna Titareva said on Monday that growing uncertainty about the path of energy prices and their impact on the inflation and growth outlook could overshadow the March 19 meeting, predicting that policymakers would prefer to “wait for more clarity and remain on hold” in March.
“We think that the MPC will not be able to determine the nature of the shock with sufficient precision until the March meeting, as the geopolitical situation remains extremely uncertain,” he said.
He said the BOE can weather “short-term shocks” but larger, more persistent shocks may require a monetary policy response.
UBS predicts that the next interest rate cuts will now be made in April and July instead of March and June. “However, we see significant risks to our base level depending on developments in the Middle East and consequences for energy prices,” Titareva said. he said.
Energy price shock
Given that it imports around 40% of its oil resources and up to 60% of natural gas, the UK is highly sensitive to fluctuations in energy prices. 2025 data shownDespite the fact that its own oil and gas production in the North Sea has decreased slightly.
This increases the likelihood of increases in energy prices for consumers.
Inflation in the UK was high but was falling due to expectations that energy prices would fall in the spring. The latest inflation reading for January showed that the rate of price growth fell to 3% in January from 3.4% in the previous month.
This has raised hopes that the BOE’s forecast that inflation will fall towards the bank’s 2% target is on track and that a rate cut from the current 3.75% level is guaranteed and imminent.
Economists say what happens next depends largely on how long the war against Iran lasts and the extent to which energy supplies are disrupted.
“The current rise in energy prices presents the BOE with a real dilemma,” JPMorgan’s Monks said.
“Still restrictive interest rates and ongoing deterioration in the labor market are creating pressure for further easing.
“But the Bank is now facing a new wave of inflation in the Middle East that is preventing a significant and rapid decline,” he said, noting that the BOE was “hurt by the stickiness of UK inflation to other economies, with one vulnerability being the UK’s high dependence on natural gas.”
The British government said it was monitoring oil and gas prices and would do its best to protect Britain’s energy security. But also It was stated in a fact sheet on Friday “The price of oil and gas is determined by international markets, not the UK. We are price takers, not price makers.”
He said the energy price cap (the maximum rate that households can charge for their energy supply) would protect households until early July, when the cap will be reviewed.
Stating that household bills may increase from now on, the government added: “The biggest driver of energy prices for homes and businesses is the wholesale gas cost determined by international markets. If this remains high, it may have an impact on bills in the future.”
