Iran war puts brakes on next Bank of England rate cut

Before war erupted in Iran, the Bank of England was widely assumed to be on track to cut interest rates at next week’s meeting.

But economists predicted that the U.S. and Israel’s attack on major oil producer Iran and the turmoil engulfing the wider Middle East as the war escalated put the brakes on the March rate cut.

“BoE cuts are possible in the first half of 2026, but March is off the table and would require an apparent easing of geopolitical tensions in April,” Alan Monks, chief UK economist at JP Morgan, said in an emailed analysis.

“For now we delay the next cut until April, but the risks are already shifting towards a longer pause and a larger growth impact,” he said.

Economists were confident that the central bank’s policymaking committee, the MPC, would lean towards a rate cut to stimulate the British economy amid lackluster growth, a weakening job market and a downward trend in inflation.

The war has damaged oil and gas infrastructure and effectively closed the Strait of Hormuz maritime corridor, jeopardizing global supplies and driving up fuel prices.

The meeting on March 19 is likely to be overshadowed by uncertainty surrounding the trajectory of energy prices and their impact on the outlook for inflation and growth, UBS Investment Bank’s European economist Anna Titareva said on Monday, adding that policymakers would prefer to “wait and hold back for greater clarity” in March.

“As the geopolitical situation remains highly uncertain, we feel that by the March meeting, the MPC will not be able to determine the nature of the shock with sufficient certainty,” he said.

While the BOE can see through “short-term shocks,” larger and more persistent shocks require a monetary policy response, he said.

UBS has forecast that the next rate cuts will take place in April and July instead of March and June. “We see significant risks to our baseline depending on developments in the Middle East and the impact of energy prices,” Titareva said.

The UK is highly sensitive to fluctuations in energy prices, importing around 40% of its oil supply and up to 60% of its natural gas, data for 2025 shows, while its own oil and gas production in the North Sea is declining.

Due to this, there is a possibility of increase in the price of fuel for consumers.

UK inflation was high but falling amid expectations that energy prices will fall in the spring. The latest inflation reading for January showed that the rate of price inflation cooled to 3% in January, down from 3.4% the previous month.

The BOE’s forecast that inflation will fall towards the bank’s 2% target is on track and that raised hopes that a rate cut from the current level of 3.75% is justified and just around the corner.

Economists say what happens next depends on how long the war on Iran lasts and the degree to which energy supplies are disrupted.

“The current spike in fuel prices leaves the BOE with a real dilemma,” noted JP Morgan’s Monks.

“Still constrained rates and the ongoing slowdown in the job market create pressure to ease it further.

“But the bank now faces another wave of inflation, apart from a significant and rapid rise in the Middle East,” he said, adding that the BOE “has been hurt by UK inflation and the stickiness of other economies, and one weakness is the UK’s high reliance on natural gas.”

The British government is monitoring oil and gas prices and has said it will do all it can to protect the UK’s energy security. But it said in Friday’s fact sheet that “oil and gas prices are determined by international markets, not the UK. We are price-makers, not price-makers.”

It said the fuel price cap – the maximum rate households can be charged for their energy supplies – would protect households until early July, when the cap is reviewed.

After that, household bills could rise, the government said: “The biggest driver of energy prices for households and businesses is the cost of wholesale gas, set by international markets. If this is high, bills could be affected in the future.”