Bank of England Holds Rate at 3.75% as Iran Conflict Fuels Inflation Shock

The Bank of England kept its benchmark lending rate at 3.75 percent in a near-unanimous vote as policymakers confront a new inflation shock driven by the war in the Middle East. The decision to hold rates, which were cut from 4 percent in December 2025, reflects mounting concern that disruptions to global oil supply will keep inflation well above the Bank's 2 percent target.

"The Bank’s decision to hold interest rates at 3.75% comes as little surprise, and marks no change since the end of 2025," said Adam Ruddle, chief investment officer at insurer LV=. "However, it is worth noting that prior to the escalation of the Iran conflict, the economic backdrop was increasingly pointing towards a rate cut.”

The Monetary Policy Committee voted 8-1 to maintain the rate, responding to inflation that rose to 3.3 percent in March. The pressure stems from the conflict in Iran, which has pushed crude oil prices above $112 a barrel, up from around $98 a week ago. In response, UK mortgage rates have surged, with the average two-year fixed deal climbing to 5.79 percent from 4.83 percent since the war began on February 28, according to data from Moneyfacts.

The hold signals a strategic pause as the Bank assesses the war's economic fallout, which threatens to push the UK's domestic energy price cap toward £2,000 this summer. While other central banks, including the US Federal Reserve and European Central Bank, also held rates steady this week, the BoE faces a direct inflation challenge from the energy spike. The next rate decision is scheduled for June 18, with April's inflation data due May 20.

Oil Shock Scrambles Rate Cut Outlook

Prior to the conflict, which began with US and Israeli attacks on Iran on February 28, cooling inflation had fueled expectations that the Bank of England would continue its easing cycle. However, Iran's subsequent closure of the Strait of Hormuz, a chokepoint for 20 percent of global oil supplies, has inverted that outlook.

The direct impact on UK households has been swift. Beyond the mortgage market, prices for motor fuels have climbed significantly. According to the Office for National Statistics, petrol prices rose by 8.6 pence per litre in March alone. "The average price of unleaded petrol today is 157.47 pence per litre, with diesel standing at 190.13 pence per litre," the RAC noted, suggesting further inflationary pressure in April.

Consumers Face Renewed Squeeze

The conflict's effects are set to broaden beyond the petrol pump. The domestic energy price cap, which limits what suppliers can charge per unit of energy, is updated quarterly. While it fell on April 1 to £1,641 for a typical household based on pre-war wholesale prices, analysts now fear a sharp reversal. Ofgem will announce the new cap for the July-to-September period on May 27.

"For many consumers, conditions are likely to worsen before any relief is felt," Ruddle of LV= said. Research from the insurer shows 36 percent of people are already worried about the rising cost of everyday items, with 34 percent concerned about higher energy bills.

The sentiment was echoed by Susannah Streeter at Wealth Club. "Every extra day the Strait of Hormuz remains closed, brings a fuel shortage crisis closer," she said. "Fuel surcharges may become more prevalent, and holidaymakers are already bracing for potential cancellations as the busy summer period looms."

The Bank of England now finds itself in a bind, forced to weigh the risk of embedding higher inflation against the danger of stifling a fragile economy. The path of the conflict in the coming weeks will be the critical variable ahead of the MPC's next meeting in June.

This article is for informational purposes only and does not constitute investment advice.