Iran war expected to prevent Bank of England from cutting interest rates

The Bank of England is expected to keep its main interest rate unchanged at 3.75% in the wake of the oil and gas price hikes following the start of the Iran war

LONDON -- Until the U.S. and Israel started bombing Iran less than three weeks ago, it was viewed as a near certainty that the Bank of England would cut interest rates again on Thursday. Now it's a near-certainty that it will leave its base rate unchanged at 3.75%.

The start of the Iran war on Feb. 28 set in train a chain of events that has done much to upend global economic forecasts, not least in how it will affect prices. The longer the Iran war and the associated closure of the Strait of Hormuz go on, the greater the economic pain will be. A fifth of the world’s crude oil goes through the strait.

The most tangible impact has been in oil and gas markets, with prices rising sharply higher since the start of the war. That has already had an impact on prices at the pump and will, if sustained, lead to higher domestic energy bills.

With these new inflationary pressures stalking the global economy, central bankers are having to reassess their projections in 2026, both for inflation and growth. On Wednesday evening, the U.S. Federal Reserve held its key interest rate unchanged, as expected.

For the Bank of England, it's likely to mean that inflation will not fall to its target rate of 2% as soon as expected and will lead to a higher price profile for the rest of the year — hardly the backdrop for further interest rate reductions anytime soon.