The war in Iran has significantly altered interest rate expectations, turning what was shaping up to be a year of steady monetary loosening into a deeply uncertain outlook that could even see the Bank of England raise borrowing costs. When the Monetary Policy Committee (MPC) meets on Thursday 30 April, the overwhelming consensus among analysts and economists is that the base rate will be held at 3.75 per cent — the level it has been since before Christmas, following four cuts last year. But the conflict in the Middle East has already forced a dramatic rethink, and the decision is no longer straightforward.
Just weeks ago, a cut in March or April looked highly probable, with a second reduction expected by the summer. That changed in mid-February when the war sent oil prices soaring, energy costs climbing and inflation rising once more. At its previous meeting on 19 March, the MPC voted unanimously — all nine members — to keep rates unchanged, a rapid reversal of the vote in February when four members had pushed for a quarter-point cut to 3.5 per cent. Minutes from the March meeting revealed that several policymakers who had been ready to lower rates changed their stance, opting instead to wait and assess how long the energy price shock would last. Now, with the April meeting upon them, the picture has only grown more complicated.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW), said the conflict had made the MPC “notably more hawkish”, though a policy hold at 3.75 per cent looked “locked in” given the “still heightened uncertainty over the ramifications of the conflict”. He warned of “stagflation fears” that would cast a long shadow over the meeting, and said at least one of the more hawkish rate-setters could break ranks and vote to raise rates. Harriet Guevara, chief savings officer at Nottingham Building Society, agreed that a hold was now “very likely”, but added: “The bigger story is how much the outlook has shifted. Just a few months ago, markets were pricing in further cuts. Now, with the conflict in the Middle East driving energy prices higher and inflation expectations rising, markets are pricing that rates are more likely to go up than down.”
Energy prices, inflation and the war’s economic impact
The single most disruptive influence on the MPC’s thinking is the surge in global oil and gas prices triggered by the Iran war. Disruptions to supply have pushed energy costs sharply higher, feeding directly into UK inflation. Official data released on 22 April showed the Consumer Prices Index (CPI) annual rate rose to 3.3 per cent in March, up from 3.0 per cent in February — a rise driven overwhelmingly by fuel costs. Petrol increased by 8.6 pence per litre and diesel by 17.6 pence per litre between February and March. Air fares and food prices also contributed to the upward pressure.
The Bank of England had previously expected inflation to fall to around 2 per cent from April this year. It now expects CPI to remain between 3 per cent and 3.5 per cent through the second and third quarters of 2026 — well above its 2 per cent target. Lloyds Bank has forecast inflation hitting 3.9 per cent by the end of the year. Higher energy bills mean households face a renewed squeeze on spending power, while businesses confront rising costs that could discourage investment and hiring. At the same time, the economic growth picture has darkened. The National Institute of Economic and Social Research (Niesr) has warned of a £35 billion economic hit and the risk of recession this year, downgrading its 2026 growth forecast by half a percentage point to 0.9 per cent. Vanguard has cut its forecast to 0.6 per cent. The Office for Budget Responsibility (OBR) had already expected growth to slow from 1.4 per cent in 2025 to 1.1 per cent in 2026. The Organisation for Economic Co-operation and Development (OECD) has similarly revised the UK’s 2026 growth outlook down from 1.2 per cent to 0.7 per cent.
Labour market data adds another layer of complexity. The unemployment rate stood at 5.2 per cent in the three months to January — the highest in five years — though some more recent figures suggest a dip to 4.9 per cent in the three months to February, while other data sources show it held at 5.2 per cent. Whichever figure is taken, Lloyds forecasts a rise to 5.6 per cent by the second half of the year. Wage growth, meanwhile, has continued to ease. Private sector regular pay rose by just 3.8 per cent year-on-year in the three months to January, the lowest since 2021. Falling real wages and rising unemployment reduce demand in the economy, which normally argues for lower rates. But the MPC is now balancing that against the threat of inflation driven by external energy shocks — over which the UK government and central bank have no direct control.
The longer-term outlook: holds, hikes or a few more cuts?
The further ahead one looks, the murkier the picture becomes. Before the war, analysts expected multiple rate cuts this year, taking the base rate possibly as low as 3 per cent or even 3.25 per cent by late 2026. The “neutral rate” — the level at which the economy can grow without fuelling inflation — is now thought to be around 3 per cent, meaning only three more cuts might have been possible in this entire cycle. But the Iran conflict has thrown those forecasts into disarray. Futures markets have swung wildly, at one point pricing in up to four rate hikes for 2026 before tempering back to a single rise. Currently, money markets are pricing almost three hikes — though analysts caution that this does not necessarily mean the Bank will follow suit.
Some of the biggest forecasting houses now expect rates to stay on hold for the rest of 2026 and well beyond. Oxford Economics predicts the Bank will hold at 3.75 per cent for the remainder of 2026 and “well into 2027”. Goldman Sachs and Citi also forecast no change this year. Rabobank does not expect further cuts, citing higher oil prices feeding into inflation. Lloyds believes the Bank will not cut until the third quarter of 2027, and that there will be no rate rise this year. On the other hand, JP Morgan, BNP Paribas and Goldman Sachs have all predicted that hawkish policymakers will push back against leaving rates unchanged, with some suggesting up to three members could vote to increase rates. Thiru noted that the Bank’s updated forecasts, due to be published alongside the April decision, are set to “further fuel stagflation fears by projecting notably higher inflation and weaker economic growth”, making policy setting “more hazardous”.
For borrowers, the implications are already being felt. Mortgage rates — which are priced using future expectations of interest rates via swap rates — have risen. The average five-year fixed rate now stands at 5.72 per cent and the average two-year fixed at 5.82 per cent, compared with pre-conflict levels. Guevara advised anyone coming to the end of a fixed-rate deal in the next six to twelve months to speak to a qualified mortgage broker. “The market is moving, and professional advice is the best way to make sure you’re not caught out,” she said. For savers, the prospect of rates staying higher, or even rising, means current variable and fixed savings accounts are already competitive — and could improve further. “The people who tend to come out ahead — whether saving or borrowing — are the ones who act while conditions are in their favour, not the ones who wait and hope,” Guevara added.
The MPC’s next decision after 30 April will be on 18 June. By then, fresh inflation, jobs and growth data will have landed, and the trajectory of the Iran war — and its impact on global energy markets — will be clearer. For now, the certainties of early 2026 have been replaced by a cautious, watchful stance, with the committee balancing rising prices against a slowing economy, and with no obvious escape route.
