Interest rates held at 3.75% as Bank of England signals possible rises amid Iran War

The Bank of England has held its benchmark interest rate at 3.75%, warning that escalating geopolitical tensions in the Middle East, particularly linked to the ongoing Iran war, could drive inflation higher and necessitate future rate increases.

In a closely watched decision, the Bank’s Monetary Policy Committee (MPC) voted 8–1 to maintain the current rate. Notably, the lone dissent came from the Bank’s chief economist, who pushed for an immediate increase, highlighting growing concern within the committee over inflationary pressures.

The decision comes less than 24 hours after global oil prices surged to $126 a barrel, their highest level since 2022, as conflict in the region disrupts energy supply chains and transportation routes.

The Bank confirmed that inflation has already risen to 3.3%, exceeding earlier forecasts made before the outbreak of the conflict. Officials expect inflation to climb further this year as higher energy costs ripple through the economy.

Rising fuel prices are already pushing up household expenses, with utility bills also expected to increase in the coming months. Businesses facing higher operating costs may pass these on to consumers, while workers could seek wage increases to offset rising living costs, potentially embedding inflation more deeply.

Despite these pressures, the Bank stressed that monetary policy cannot directly influence global energy prices. Instead, its role is to prevent temporary price shocks from becoming persistent inflation.

“We are monitoring the situation very closely,” the MPC said in its statement. “Whatever happens, we will make sure that inflation returns to the 2% target in the medium term.”

Industry leaders largely welcomed the decision to hold rates, citing the need for stability during a volatile period.

Neil Rudge, Chief Banking Officer at Shawbrook, said the move would provide relief to businesses already grappling with rising costs and supply chain disruption.

“This will be a welcome decision for UK businesses,” he said. “Leaders need to stay agile and make decisions in a constantly shifting environment.”

Nick Smith, CEO of Reward Funding, described the decision as “a clear choice in an incredibly difficult and unknown situation,” noting that holding rates offers short-term certainty for SMEs.

“The decision to hold rates offers a welcome sign of relative stability, yet the underlying message for UK SMEs is one of continued caution.

“An increasingly unpredictable global landscape is no doubt making it more challenging to time major investments, but we’re seeing that small business’ appetite for growth remains unchanged.

“In this environment, it’s important that we continue to nurture SME ambitions and their confidence to invest. This will mean seeking and unlocking potential with targeted, and flexible funding that gives them reassurance when markets remain uncertain.”

While the Bank has paused for now, its messaging suggests that further rate hikes remain firmly on the table. Much will depend on how long energy prices remain elevated and how strongly inflation feeds into wages and broader pricing.

The next decision from the Bank of England is due on 18 June, when policymakers will reassess inflation trends and the evolving impact of global energy markets.