The Bank of England held its key interest rate steady at 3.75% on Thursday, signaling that policy may have to move toward higher rates as officials judge the longer-term economic damage from the Iran war and the disruption to global oil supplies tied to the Strait of Hormuz. In a meeting that showed some disagreement among policymakers, minutes released by the bank indicated that most members voted to keep rates unchanged, while one voted to raise them by a quarter point.
Bank Gov. Andrew Bailey said the current level was “a reasonable place given the situation of the economy and the unpredictability of events in the Middle East,” and he framed the central task as bringing inflation back to the Bank of England’s 2% target once the war’s immediate energy-price effects pass. He added that the bank would adjust as needed based on what happens next in energy markets and in the wider economy.
The bank also published a set of forecasts alongside the policy decision because of the uncertainties around the conflict. In its worst-case scenario, where oil and gas prices stay higher for longer, the Bank of England said U.K. inflation could rise to as much as 6.2% by early 2027, up from 3.3% at the time of the assessment. The bank said it considered alternative ways that events could unfold, including scenarios that could involve multiple rate rises and an increased risk of recession.
Before the Iran war began on Feb. 28, financial markets had expected the Bank of England to cut rates as inflation was predicted to drop toward the 2% target during the spring. That assumption has weakened as energy prices surged, pushing up costs more broadly and forcing the bank—and other central banks—to revisit how long conflict-related volatility will last and whether it will keep inflation elevated.
Energy prices moved higher again in the days leading into the decision, with traders pricing in an expectation that the Strait of Hormuz would remain closed for a long time. Brent crude, the international benchmark, briefly rose to over $126 a barrel on Thursday—its highest level since the aftermath of Russia’s full-blown invasion of Ukraine four years ago.
Beyond energy prices themselves, Bank of England policymakers planned to watch whether the inflation spike begins to spread through the economy, including through higher wages. They also said they would track how an oil-price shock could affect growth and whether it could push the economy toward recession, which could reduce price pressures.
Luke Bartholomew, deputy chief economist at asset manager Aberdeen, said he expected recession risks to limit second-round inflation effects. But he cautioned that if oil prices continued to rise, it would be difficult for the Bank of England to avoid hiking later this year.
The decision also intersects with Britain’s domestic policy debate, with markets watching for actions from the Labour government to limit the impact of inflation on households and businesses. Treasury chief Rachel Reeves said, “The war in the Middle East is not our war, but it is one we have to respond to.”