Interest rates to remain frozen amid inflation fears: What is behind the Bank of England's latest decision?
Policymakers voted unanimously to keep rates at 3.75 per cent with cuts now looking likely to be off the table as the war rages on, sending oil and gas prices racing higher
The UK has been warned of a possible inflation rise as the Bank of England kept interest rates on hold amid the Middle East war - but what could it mean going forward?
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What happened to interest rates on Thursday?
The Bank decided to keep rates locked at 3.75 per cent after all nine members of the Monetary Policy Committee (MPC) voted for a hold.
Only a few weeks ago, a cut to 3.5 per cent was looking certain, but the start of the Iran war at the end of February appears to have scotched hopes of an imminent reduction in rates as inflation is set to surge.
What is happening with inflation in the UK and why does this influence rates?
The Bank sets interest rates with an aim to maintain inflation at its two per cent target. Consumer Prices Index (CPI) inflation fell to 3 per cent in January, and MPC forecasts in February showed the rate falling toward 2 per cent from April, largely due to Government efforts to cut household energy bills.
But these forecasts are now all out of date after the Middle East conflict has sent oil and gas prices rocketing higher, which is set to push up the cost of living in the UK and many countries worldwide.
The MPC is now expecting inflation to be around 2 per cent in the second quarter of 2026, up from the 2.1% that had been forecast in February, and is forecasting a rise potentially up to 3.5% in the third quarter.
What do oil prices in the Middle East have to do with inflation in the UK?
The disruption being caused by the war is affecting global oil and gas supplies and pushing up wholesale prices, with the key Strait of Hormuz shipping route blocked and attacks on facilities in Qatar adding to the woes.
This all feeds through to the prices we pay at the petrol pumps and the cost of gas and electricity, which is set to send inflation rising sharply.
The Bank cautioned it will also likely mean higher food prices, given rising costs of shipping and fertiliser on global markets.
Will interest rates have to rise?
The Bank has said it stands "ready to act" if the war sends inflation surging. Some members of the MPC signalled rates may need to rise in the event of prolonged conflict, but added such a move would not be rushed.
Rate-setter Catherine Mann cautioned: "I see the balance between inflation and activity to have shifted away from considering a cut towards considering a longer hold, or even a hike at some point."
Why are lenders already increasing mortgage costs if rates have been held?
A wave of Britain’s biggest lenders have been hiking mortgage rates on the back of the conflict, prompted by a sharp rise in swap rates, which are used to price mortgages.
The average two-year fixed-rate mortgage on the market has already increased from 4.83 per cent at the start of March to 5.32 per cent by Thursday morning – the highest since April 2025 – according to financial information website Moneyfacts.
Deals are also being pulled across the mortgage market, with nearly 700 fewer products since March 9, which is troubling for homeowners looking to buy and the 1.8 million who are rolling off fixed rate deals in 2026.