Bank of England Holds Steady as Iran War Dampens Rate Cut Hopes

The Bank of England (BoE) is widely expected to maintain its base interest rate at 3.75% for the remainder of 2026, a significant shift from earlier predictions of potential cuts. This change in outlook is largely attributed to escalating geopolitical tensions following the conflict in Iran and the subsequent surge in oil prices.

From Rate Cut Expectations to Potential Increases

Prior to the recent conflict, financial markets anticipated a rate cut at the BoE’s next meeting on March 19th, with an 80% probability. However, the outbreak of war has dramatically altered these expectations. Markets now predict a 99% probability of a hold at the upcoming meeting, and no rate cuts are expected throughout the year. Some forecasts even suggest a potential rise to 4% by next June The Guardian.

Oil Prices and Bond Yields Fuel the Shift

The conflict in Iran has driven oil prices above $100 a barrel, contributing to inflationary pressures. This has led to a rise in UK two-year bond yields, reaching 4.129% – up from 3.52% before the conflict and the highest level since April 2025 The Guardian. This increase in bond yields, a proxy for interest rates, represents the largest one-day increase since the mini-budget in 2022 The Guardian.

Impact on the UK Economy

Economists believe the BoE will likely delay any rate cuts until there is a clear calming of geopolitical tensions CNBC. The war has disrupted oil and gas supplies, potentially jeopardizing global supplies and driving up energy prices. The UK economy is particularly sensitive to fluctuations in energy prices and inflation CNBC.

Inflation Concerns and Potential Rate Hikes

Rising prices and energy bills could fuel higher inflation, potentially prompting the Bank of England to eventually raise interest rates The Independent. Oxford Economics predicts a hold vote in March but has lifted its inflation forecast for later in the year, anticipating rising energy bills The Independent.

Key Takeaways

• The Bank of England is expected to hold interest rates at 3.75% throughout 2026.
• The conflict in Iran and rising oil prices are the primary drivers of this shift.
• Bond yields have increased significantly, reflecting market expectations.
• Inflationary pressures could lead to further rate hikes.