Bank of England governor says Iran war energy shock complicates rate decision

Andrew Bailey said the Iran war’s energy shock had turned the Bank of England’s next rate decision into “very very difficult” judgment, after weeks of conflicting signals from inflation, growth and financial markets. The central bank left Bank Rate at 3.75% on March 19 and warned that the conflict had lifted energy and commodity prices enough to push inflation higher than expected this year, with consumer prices now seen around 3% to 3.5% in the second and third quarters. The Bank’s next scheduled decision is due on April 30.

The shock was already feeding straight into household finances. The Bank’s Financial Policy Committee said around 1.3 million more households faced higher mortgage costs after lenders moved rates up, and that about 5.2 million mortgagors, or 58% of the total, could face higher repayments by the end of 2028. In the wider market, the average two-year fixed mortgage climbed from 4.83% on March 2 to 5.84% by Monday, a jump that added about £1,881 a year to the cost of a typical £250,000 loan.

Businesses were bracing for the same squeeze. A Bank of England survey found firms expected to raise prices by 3.7% over the next 12 months, up from 3.4% in February and the sharpest monthly rise since April 2024, while expected consumer price inflation reached 3.5%. The Bank said it was watching closely how much of the energy spike would be passed through to customers, because that would determine whether the shock stayed temporary or became embedded in everyday pricing.

The policy dilemma has only sharpened as growth weakens. The IMF cut Britain’s 2026 growth forecast to 0.8% from 1.3%, the steepest downgrade for any large advanced economy, and blamed the country’s exposure as a net energy importer and the likelihood of slower rate cuts. That leaves Bailey and his colleagues trying to thread a narrow path: respond to a supply-driven inflation surge without choking an economy already facing weaker household demand, pricier credit and a longer squeeze on living standards.