Global energy disruption caused by the Iran war has hit UK shores, prompting the Bank of England to hold rates at 3.75% on Thursday while warning that rising oil and gas prices could push UK inflation above 3% and trigger borrowing cost increases. The monetary policy committee voted unanimously to hold, but officials made clear that the energy market shock was significant and potentially lasting. The Bank described the conflict as a new and unwelcome development that had fundamentally changed the near-term economic outlook.
The energy disruption is being transmitted to the UK economy through global oil and gas markets, which have been significantly affected by the US-Israel operation against Iran. UK petrol prices have risen as a direct result, and the Bank is concerned that household energy bills could follow if supply chain disruption continues through the year. The Bank now projects inflation rising to approximately 3.5% in March and remaining above its 2% target throughout 2026.
Governor Andrew Bailey said the Bank was monitoring the situation closely and stood ready to act if the inflation outlook deteriorated further. He called for the restoration of disrupted energy supply lines as the most effective means of addressing the inflation threat, acknowledging that this was beyond the Bank’s direct power to achieve. Within its mandate, the Bank would use interest rate policy as needed.
Markets responded with a hawkish repricing. UK gilt yields climbed, the FTSE 100 declined, and the pound strengthened against the dollar as traders moved to price in rate hikes before year end. Analysts noted that the speed of the market repricing reflected the scale of the changed expectations created by the war.
The energy disruption that has arrived on UK shores from a distant conflict underlines the UK’s vulnerability to global energy market volatility. Policymakers, businesses, and households alike will need to adjust their plans and expectations as the conflict continues to shape the energy price environment. The government’s response on energy support and the Bank’s forthcoming policy decisions will be critical in determining how much of the disruption feeds through to household finances.