Governor Andrew Bailey delivered a notable pushback against market speculation on Thursday, even as the Bank of England kept its interest rate at 3.75% and acknowledged that inflation risks had risen due to the war in the Middle East. Bailey urged investors not to draw “strong conclusions” about imminent rate rises, emphasising that the Bank’s current stance was one of watchful waiting. The unanimously held rate reflects a committee still assessing the scale and duration of the Iran conflict’s economic fallout.
Energy markets have been roiled by the US-Israel military operation against Iran, driving up global oil and gas prices in a way that threatens the UK’s disinflationary progress. Inflation had been expected to fall to around 2% from April, but those forecasts are now being revised sharply upward. The Bank projects inflation could climb to 3.5% in March and remain elevated well above target throughout 2026.
Despite Bailey’s cautious tone, several MPC members openly acknowledged the shift in the risk balance. Swati Dhingra, previously among the most vocal advocates for rate reductions, indicated she might now support higher rates if inflation remained persistently above target. Megan Greene noted that households and businesses were increasingly sensitive to inflation shocks after years of economic disruption.
The economic data released alongside the decision presented a mixed picture. Wage growth slowed sharply in the three months to January, typically a sign that inflationary pressure is easing. Yet the energy price surge threatens to overwhelm that progress and reignite the kind of cost-of-living pressures that have battered UK households for several years.
Politically, the decision adds ammunition to opposition parties critical of the government’s economic management. Mortgage rates on five-year fixed deals are reportedly hitting multi-year highs, adding pressure to household finances. The Bank’s next meeting will be closely watched for any signs that the balance of opinion has shifted decisively toward tightening.