As the Bank of England’s Monetary Policy Committee (MPC) concludes its latest meeting today, all eyes are on tomorrow’s noon announcement for what may be one of its most consequential decisions in recent memory. The committee, deeply fractured in recent months, now faces a new and volatile challenge that could force a rare consensus: the economic shockwaves from escalating conflict in the Middle East.
The current UK base rate stands at 3.75%, a level maintained since the MPC’s last meeting on 5 February. At that gathering, the committee signalled its intent to cut further, stating that “on the basis of the current evidence, Bank Rate is likely to be reduced further.” Just weeks ago, most City experts predicted that cut would come this Thursday. That calculus has been upended.
A Committee Divided, A Governor’s Casting Vote
Recent meetings have revealed a stark split among the MPC’s nine members, with votes to cut or hold rates ending in a 5-4 deadlock in four of the last five gatherings. This has repeatedly left Governor Andrew Bailey to cast the deciding vote. The fault line runs between the so-called ‘doves’, who argue that disinflation is progressing well enough to justify further cuts, and the ‘hawks’, who treat the inflation data with more caution and demand more progress.
This internal debate has played out against a backdrop of gradually improving price pressures. UK annual inflation fell to 3.0% in January 2026, down from 3.4% in December and its lowest level since March 2025, driven by easing transport and food costs. Yet the Middle East conflict, particularly involving Iran, has injected severe uncertainty, sparking a spike in global oil and gas prices and threatening to reverse that progress.
The Geopolitical Shock Altering All Forecasts
The UK’s reliance on gas from the region makes it acutely vulnerable to supply disruptions. Economists estimate that a $10 per barrel rise in oil prices can add around 0.2 percentage points to inflation in the following months through higher fuel and transport costs. The Office for Budget Responsibility (OBR) has warned the energy price shock could push inflation to 3% by year-end, with some analysts forecasting a potential jump to 4% if prices remain high.
This threat has dramatically shifted expectations. Where a rate cut once seemed probable, the consensus among economists now is that the MPC will hold rates steady. Some even speculate the committee could later consider a rate hike to stave off a resurgence of inflation—a scenario virtually unthinkable just a month ago.
Governor Andrew Bailey has himself acknowledged the path ahead is “more uncertain,” stating in February that a near-term cut was “a genuinely open question.” The Bank’s longstanding watchwords of “gradual and careful” now apply to a landscape fraught with new risks.
An Economy Already Showing Signs of Strain
The geopolitical crisis complicates an already fragile economic picture. The OBR forecasts real GDP growth will slow from 1.4% in 2025 to 1.1% in 2026, a downgrade reflecting weaker-than-expected performance late last year. The British Chambers of Commerce (BCC) projects similarly slow growth of 1.0% for 2026.
Meanwhile, the labour market is softening. Unemployment has risen to a five-year high of 5.2%, job vacancies are declining, and businesses are scaling back recruitment amid rising labour costs. The Bank of England has revised its average 2026 unemployment forecast up to 5.3%.
This creates a difficult balancing act for the MPC: how to respond to the threat of imported inflation without further dampening an already slowing economy.
From Historic Lows to a ‘Higher for Longer’ Era
The current moment is a sharp turn in a long journey for UK interest rates. The Bank began its most recent cutting cycle in August 2024, after raising the base rate from 0.25% at the end of 2021 to a peak of 5.25% in summer 2023 to combat the inflation surge that followed the 2022 energy crisis.
Six cautious cuts then brought the rate down to its current 3.75% by December 2025. Historical context underscores the scale of recent movements: the lowest base rate on record was 0.1% in March 2020, while the highest was 17% in November 1979.
Prior to the Middle East conflict, market expectations, as cited by the OBR in March 2026, were for rates to fall further to around 3.3% by late 2026. That outlook is now highly sensitive to day-to-day developments abroad.
Implications for Borrowers and Broader Context
For borrowers, this uncertainty translates into potential short-term increases in mortgage rates, clouding earlier predictions of a steady decline in home loan costs through 2026. Public opinion reflects the confusion, with significant portions of the population expecting rates to rise, fall, or stay the same.
The MPC’s decision will be scrutinised against the actions of other central banks. Notably, the euro area’s annual inflation rate was 1.9% in February 2026, slightly up from January’s 1.7% and already below the Bank of England’s 2% target.
As the committee prepares its announcement, external bodies like the City AM Shadow MPC have voted 7-2 in favour of holding rates. Yet dissenting voices remain; some economists argue the Bank should continue cutting, believing inflation will fall back to target and monetary policy is still restrictive. Others warn that if the energy shock persists, rates could climb as high as 4.5%.
Ultimately, tomorrow’s decision will reveal whether the profound external shock of war has, for the first time in months, united a fractured committee in caution, or if the deep-seated divisions between doves and hawks persist even in the face of a global crisis.
