Bank of England unanimously votes to press pause on interest rates as Iran worries grow
The Bank of England kept interest rates at 3.75 per cent today; This is a sign of uneasiness about what the war in Iran might do to inflation.
Before the US bombed Iran, the common assumption in the City was that the Bank would cut interest rates, believing that inflation was under control and unemployment was becoming a concern.
He hoped to help mortgage borrowers and encourage businesses to hire by lowering borrowing costs.
Instead, today he erred on the side of caution with a unanimous vote that underlined the uncertain nature of the current climate.
The Bank’s Monetary Policy Committee (MPC), comprised of nine high-powered economic experts overseen by Bank Governor Andrew Bailey, has cut interest rates four times in 2025.
In Thursday’s minutes, the MPC sought to explain why waiting was the safest course of action as the broader geopolitical landscape continues to unfold.
“Conflicts in the Middle East have caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects on businesses’ costs. Before this, the decline in inflation in domestic prices and wages was continuing. CPI inflation will be higher in the near term as a result of the new shock to the economy,” the report said.
“The Committee will continue to closely monitor the situation in the Middle East and its impact on global energy supplies and energy prices. It is ready to take the necessary steps to ensure that CPI inflation remains on track to reach the 2% target in the medium term.”
“The world has changed dramatically over the last few weeks and the situation is changing every day,” said Scottish Friendly savings expert Kevin Brown. “Higher energy costs risk pushing up inflation in the near term. But it is largely imported rather than produced domestically, which helps explain why the Bank has decided not to act today. By keeping rates steady, the Bank is effectively buying time to assess whether these pressures persist, rather than signaling a renewed, definitive shift towards tightening.”
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Uncertainty remains about what will happen next, with the MPC meeting for another vote towards the end of April.
“The outlook remains extremely balanced: rates could rise if inflation gathers pace, or fall if economic conditions continue to weaken. For both consumers and investors, it will be vital to stay informed and seek guidance as the environment evolves,” said Adam Ruddle, LV’s chief investment officer.
Shadow Chancellor Sir Mel Stride MP accused the government of “undermining” the UK’s outlook due to still high inflation rates. “Labour’s economic mismanagement has weakened our economy and left us vulnerable to external shocks. We enter this with the highest inflation in the G7 as the country braces for the impact of events in the Middle East,” he said.
“Instead of fixing the roof while the sun shines, Labor raised taxes to record levels and fueled inflation with reckless spending and borrowing, causing the economy to stagnate and inflation to rise well above the target for 2025. Britain is paying the price for Rachel Reeves’s irresponsible choices.”
City analysts, including those at Goldman Sachs, still think it will cut interest rates two or three times this year, but a rise in oil and gas prices since the start of the war has put that thinking on hold.
The wait-and-see approach may be followed by other central banks around the world.
Investec’s Philip Shaw said: “The Bank of England’s decision to keep interest rates unchanged is actually no surprise. There was speculation about a possible cut a month ago, but hostilities with Iran have led to a rise in oil and gas prices which, if sustained, will lead to inflation. We won’t rule out cuts in interest rates later this year, but we’re not going to rule out cuts in interest rates later this year, but we’d first see an end to the Iran conflict and energy prices starting to fall again as evidence that the UK is not facing a period of higher inflation.” It is necessary.”
Rising government bond yields in the UK have caused new mortgage costs to rise. There are some rumors of “fuel rationing” but experts say this is unlikely as the UK can and does import oil and gas from America and Norway.
Economists now expect the Bank of England to keep a tight grip on interest rates until at least the summer to check whether inflation is getting out of control.
Both US and global markets are mostly betting that the Iran conflict will end soon and oil prices will fall, reducing the threat of inflation.
When oil prices peaked last week, some began speculating that the next move in interest rates could be upward rather than downward.
Peter Goves of MFS Investment Management doubts this. He says: “Depending on the magnitude and duration of the shock, the Bank of England may only continue to cut later in the year. We are struggling with the idea that the Bank of England could or will raise interest rates anytime soon, which would greatly weigh on an already fragile demand environment.”
City economists still think the Bank’s base rate will finish the year at 3 percent. But this assumes inflation does not defy expectations and rise above the current 3 percent.
The Bank of England’s official inflation target is 2 per cent, set by the government.
Paul Dales of Capital Economics said: “Just a few weeks ago the Bank’s Monetary Policy Committee (MPC) looked set to cut interest rates to 3.50 per cent. Moreover, at the previous policy meeting in February Governor Bailey said ‘I don’t want to support 3.25 per cent but that is a reasonable market curve’.”
Andrew Lloyd, Managing Director of national property firm Search Acumen, said: “The fall in interest rates over the past 18 months has been welcome, but today’s decision to wait and hold signals to markets to do the same will hit consumers’ pockets as banks pull mortgages such as Truss 2.0, pausing both domestic investor spending and the urgent need for affordable mortgage rates. There is an argument that last year’s property tax reform has dampened buyer morale and the eventual downturn in the property market is over. Cheap in the COVID era.” debt, house movers need more reasons to make the move, not less.”
