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

London — Until the US and Israel began bombing Iran three weeks ago, the Bank of England was seen as certain to cut interest rates again on Thursday. It is now certain to leave its base rate unchanged at 3.75%.

The start of the Iran war on February 28 set off a chain of events that did much to raise global economic forecasts, not least how it would affect prices. As the Iran war and the closing of the Strait of Hormuz progress, the economic pain will increase. A fifth of the world’s crude oil passes through the strait.

The most obvious impact has been seen in the oil and gas markets, where prices have risen sharply since the start of the war. That has already impacted prices at the pump and, if continued, will lead to higher domestic fuel bills.

As these new inflationary pressures continue to haunt the global economy, central bankers will need to reassess their projections for both inflation and growth in 2026. On Wednesday evening, the US Federal Reserve kept its key interest rate unchanged as expected.

As for the Bank of England, inflation will not fall to its target rate of 2% as quickly as expected, leading to a higher price profile for the rest of the year – a backdrop for further interest rate cuts anytime soon.

“The bank would be wise to wait and see if a rise in energy prices triggers a rebound in underlying price pressures before acting,” said Andrew Wishart, UK economist at Berenberg Bank.

Wishart said the bank’s nine-member monetary policy committee could cut its key interest rates in June from the current 3.75% – meaning the closure of the Strait of Hormuz is short-lived.

“If energy prices remain high for six months, the bank will probably delay the reduction until 2027,” he said.

After last month’s rate-setting meeting, financial markets are predicting at least a two- to three-quarter-point cut in the base rate this year. With the decision to keep rates unchanged, economic projections later showed inflation hitting the target in the spring. But the bank’s governor, Andrew Bailey, said “everything is going well”, adding that there should be room for some more cuts this year.