The war in the Middle East has opened a new and unwelcome chapter in the UK’s inflation story, as the Bank of England voted unanimously to hold rates at 3.75% on Thursday and warned that the US-Israel conflict against Iran could push inflation above 3% and require rate hikes in the months ahead. After years of inflation shocks driven by the pandemic and the 2022 energy crisis, Britain now faces a third potential episode of above-target price growth, this time triggered by geopolitical conflict far beyond its borders. The Bank described the development as a significant new shock to the economy.
The new chapter in the inflation story is being written by the war’s impact on global energy markets. Oil and gas prices have risen sharply since hostilities began, threatening to reverse the disinflation that had been building in the UK economy. The Bank now projects inflation rising toward 3.5% in March and remaining elevated throughout 2026, a materially worse outcome than had been forecast before the conflict began.
Governor Andrew Bailey said the Bank was monitoring the new chapter carefully and stood ready to write its own response through monetary policy if necessary. He warned that the effects were already visible at UK petrol stations and could spread to household energy bills if supply disruption continues. The Bank’s current stance, he said, was to hold and observe rather than act prematurely on the basis of incomplete information.
Financial markets moved to price in rate hikes before year end, pushing UK gilt yields higher and sending the FTSE 100 lower. The pound strengthened against the dollar as investors adjusted their outlook for UK monetary policy. Analysts noted that the new chapter in the inflation story had significant consequences for households, businesses, and the government alike.
For UK households already wearied by years of above-target inflation, the opening of a new chapter is deeply unwelcome. The prospect of higher energy bills, rising mortgage costs, and the continued uncertainty about the future direction of prices creates a financial environment that will test the resilience of family budgets across the country. The Bank’s task of navigating this new chapter while maintaining credibility on its inflation mandate has never been more challenging.