𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

UK interest rates have been held at 3.75% but the Bank of England has signalled it was ready to raise borrowing costs should war in the Middle East keep energy prices elevated.

The Bank left rates unchanged in a unanimous vote among all nine members of its Monetary Policy Committee (MPC) on Thursday.

It is the first time that all members have voted the same way since September 2021.

The US-Israel war with Iran had caused a significant spike in global energy prices, which was pushing up fuel costs and could lead to higher household energy bills, the MPC warned.

It had therefore decided to keep interest rates the same while policymakers assess developments in the Middle East.

But the MPC signalled that if the conflict persists and has a bigger impact on UK prices, it would need to take a “more restrictive policy stance”, which indicates higher interest rates to control inflation.

Governor Andrew Bailey said: “War in the Middle East has pushed up global energy prices.

“You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year.

“The best way to tackle this is at the source by reopening energy supply lines.”

He said he would be monitoring developments “extremely closely” and that the Bank “stands ready to act” to make sure inflation returns to the 2% target level.

Other members of the MPC agreed that interest rates may need to rise in response to persistent pressure on inflation.

Swati Dhingra, who has been the most consistent in voting for rate cuts, said the UK’s economic outlook was at a “crossroads” but that rates may need to be increased if there were to be prolonged disruption to oil and gas supplies.

Catherine Mann said her view had shifted away from considering a rate cut and towards a longer hold, “or even a hike at some point to lean against inflation persistence”.

Financial markets were already pricing in the potential for interest rates to be increased this year following the Bank’s announcement, with some betting on them going 0.5 percentage points higher.

Mr Bailey told reporters on Thursday that he would “caution against reaching any strong conclusions about raising interest rates” and suggested that markets were “getting ahead” of themselves in predicting multiple rate hikes this year.

Nevertheless, the shifting outlook came as the MPC revised its outlook for UK inflation over the coming months thanks to the recent energy price shock.

It was now expecting inflation to be around 3% in the second quarter of 2026, up from the 2.1% that had been forecast in February.

Higher wholesale gas prices could then feed through into a higher Ofgem energy price cap from July, which could add around 0.75 percentage points to inflation over the third quarter.

This, combined with firms potentially passing on higher energy costs to consumers, could mean CPI inflation increases to up to 3.5% in the third quarter, up from the previous 2% forecast, the MPC said.

The Bank said that even a short-lived conflict was likely to leave energy prices elevated for a sustained period, and if the war continues to escalate, then inflation could be pushed up further.

Events over the next six weeks could shed light on how long the war lasts and how big the ripple effect could be, particularly to the supply of oil, gas and other commodities such as fertiliser produced in the Middle East.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “The MPC’s decision to hold rates was a foregone conclusion after the war in Iran spiked oil prices.

“But the vote and guidance changes by the MPC were hawkish compared to market expectations.”

He added: “Our call is Bank rate on hold in 2026, but the surge in oil and especially natural gas prices this morning tilts the risks further towards hikes.”

UK natural gas prices spiked by more than 20% on Thursday morning and Brent crude oil was up by about 8%, before settling slightly lower.

Elsewhere, the cost of UK Government borrowing was sent higher following the Bank of England’s remarks.

Two-year gilts, which track interest rate expectations, saw yields jump 0.3 percentage points higher to 4.39%.

Yields on 10-year gilts rose 0.1 percentage points to 4.77%, which is close to its highest level since 2008.

Yields move inversely to prices, meaning they rise as prices fall.