Interest rates held at 3.75% as Bank of England warns Iran war ‘shock’ will push up inflation

The Bank of England’s decision to hold interest rates at 3.75% marks a pivotal moment for the UK economy in 2026. What was once expected to be the beginning of a rate-cutting cycle has been abruptly derailed by a geopolitical crisis thousands of miles away.

As conflict in the Middle East intensifies—particularly involving Iran—global energy markets have been shaken, sending oil and gas prices soaring. The result? A renewed inflation threat that has forced policymakers into a cautious “wait-and-see” stance.

This article breaks down everything you need to know: why rates were held, how the Iran war is influencing inflation, what it means for mortgages and savings, and what could happen next.

📊 Bank of England Holds Rates at 3.75%: What Happened?

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously (9–0) to keep the base interest rate unchanged at 3.75%, surprising some analysts who had anticipated a split decision.

• The move reflects growing concern about inflation risks linked to the Iran war

• Policymakers signaled that future rate hikes are now possible

• Expectations for rate cuts have been pushed back or cancelled

Before the conflict escalated, the outlook was very different.Inflation had been easing, and many economists expected rates to fall in early 2026.

However, the war has changed everything.

According to central bank officials, the conflict represents a “shock to the economy” that could reverse recent progress on inflation.

⚠️ Iran War Triggers Global Energy Shock

The biggest driver behind the Bank’s decision is the surge in global energy prices.

Key developments:

• Brent crude oil has surged to $114–$120 per barrel

• European gas prices have jumped by 17–25%

• Attacks on major energy facilities and supply routes have disrupted markets

Energy is a major component of inflation.When oil and gas prices rise:

• Fuel becomes more expensive

• Household energy bills increase

• Businesses pass higher costs onto consumers

This creates a chain reaction across the economy, pushing inflation higher.

📈 Inflation Now Expected to Rise Again

The Bank of England has warned that inflation—previously expected to fall—will now rise above target levels again.

Updated projections:

• Inflation could hit 3.5% in the near term

• It may remain above the 2% target throughout 2026

• In worst-case scenarios, it could even approach 4–5%

This represents a major shift from earlier forecasts, which predicted inflation would drop close to 2%.

Why inflation is rising again:

1. Energy costs (oil, gas, electricity)

2. Transport and ukbreakingnews24x7 logistics expenses

3. Food prices linked to energy inputs

4. Potential wage pressures (“second-round effects”)

The Bank specifically warned that sustained high energy prices could lead to long-term inflation persistence, not just a temporary spike.

🏦 Why the Bank Didn’t Cut Rates

At first glance, holding rates might seem surprising—especially with economic growth slowing.