The Bank of England has kept interest rates at 3.75%.
A cut in rates was expected but the Monetary Policy Committee (MPC) decided to hold rates due to the Middle East war and “assess how events unfold”.
The Bank warned the “new shock to the economy” will lead to prices increasing more quickly. It now expects inflation to be around 3.5% in March.
Bank of England governor Andrew Bailey said:
“War in the Middle East has pushed up energy prices. You can already see that at the petrol pump and, if it lasts, it will feed into higher household energy bills later in the year.
“Whatever happens, our job is to make sure inflation gets back to its 2% target.”
Reaction to interest rates held at 3.75%
Anna Leach, chief economist, Institute of Directors:
“The outbreak of conflict in the Middle East has re-framed the inflation landscape, both globally and in the UK. At this point, oil prices are closing on their 2022 peak, while gas prices are at around a quarter of their level at that time. With such significant rises and market volatility, it’s no surprise to see a unanimous vote from the MPC for a rate hold while they assess the situation.
“The growth and inflationary impacts from the conflict come down to the significance of the energy supply and other market disruptions and their duration. Ahead of the attack on Qatar’s gas field, the IEA had already described the energy supply disruption as “unprecedented” making it inevitably difficult for forecasts of impact to be precise. Nonetheless, the Bank expect inflation to be up to 1.5% points higher by Q3 than they predicted in February, reaching 3.5%.
“Ideally the MPC would look through this type of cost shock. But with household and business expectations for inflation remaining stubbornly elevated, risks remain from higher inflation becoming imbedded in the system. Arguably the risks from second-round inflationary effects this time are lower. The economy is markedly weaker compared with the outset of the Ukraine war, with unemployment higher and private sector wage growth closing on 3%. These are not strong conditions for either wage growth to track higher or for businesses to be able to pass through costs via prices.”
David Bharier, head of research, British Chambers of Commerce:
“The ongoing conflict in Iran threatens to knock the recent progress on inflation off course. Our latest economic forecast suggests inflation is likely to reach 2.7% by Q4 2026, and we anticipate no further rate cuts in the near term. That’s concerning news for businesses looking to borrow as a springboard for investment and growth.
“But much will depend on the duration of the conflict. Sustained rises in energy costs, as we are now seeing, will worsen the outlook on inflation dramatically.
“At the same time the labour market faces pressure as continually rising labour costs weigh on hiring decisions. AI could also play a role – our new research, released today, points to a small number of deeper AI-using firms that are more likely to look at headcount reductions.
“This could point towards a potential stagflation scenario. Government should be considering all options to soften the business impacts of inflation, particularly from the cost of energy.
“The chancellor was right to identify regional investment, AI and the EU reset as vital steps on the pathway to higher growth. The coming months must be about delivery in partnership with business.”
Neil Rudge, chief banking officer, Shawbrook:
“The decision to hold rates will be a setback for SMEs, particularly given expectations that we were entering a cutting cycle. Recent geopolitical instability has shifted the outlook and, with it, the prospect of near-term relief on borrowing costs.
“For businesses already managing tight margins, a prolonged period of higher rates, alongside rising energy costs and ongoing supply chain disruption, creates a more challenging operating environment. Planning becomes harder and investment decisions are more finely balanced.
Despite this, the underlying picture remains one of resilience. SMEs continue to show strong ambition, even in uncertain conditions, and many will still be looking to invest and grow. In that context, access to the right kind of finance becomes increasingly important. It is not just about availability of capital, but ensuring funding works for businesses as they scale and navigate a more complex environment.
“The focus now is on maintaining momentum. For many SMEs, that will mean balancing caution in the short term with a continued commitment to longer-term growth.”
Theo Chatha, CFO and MD, Bibby Financial Services:
“Today’s interest rate hold will surprise no one watching the markets – but just weeks ago, a cut felt all but certain. The Iran war changed that almost overnight: oil prices spiked, trade routes tightened, and sterling weakened sharply. For businesses trading internationally, that kind of volatility isn’t abstract – it hits margins directly through higher borrowing costs and currency swings.
“Trying to predict what comes next right now is a losing game. The businesses demonstrating real resilience are the ones focused on what they can control: locking in the FX rates they need to protect their margins. A proactive FX strategy isn’t a nice-to-have right now. It’s essential.”