The reverberations of the Gulf conflict are being felt in British living rooms and financial markets alike, as the Bank of England held interest rates at 3.75% on Thursday and warned that the US-Israel war against Iran could push UK inflation above 3% and trigger rate hikes within months. The monetary policy committee voted unanimously to hold, but the hawkish tone of the statement reflected the genuine disruption that the conflict has created for the UK’s economic outlook. Officials described the war as a significant new shock that the Bank was carefully monitoring.
Global energy markets have been the primary channel through which the conflict has affected the UK economy. Oil and gas prices have risen sharply since the war began, threatening to undo the disinflationary progress that had been building in Britain’s economy over recent months. The Bank now projects inflation rising to approximately 3.5% in March and staying above its 2% target throughout 2026.
Governor Andrew Bailey was direct about the consequences. He said the war’s effects were already being felt at UK petrol stations and warned that household energy bills could follow if supply chain disruptions persist. The Bank, he said, was in a watching brief but stood ready to act if the inflation outlook deteriorated further. He specifically cautioned against interpreting the hold as a signal that rate hikes were inevitable.
Financial markets drew their own conclusions. UK gilt yields rose, the pound gained against the dollar, and the FTSE 100 fell as traders priced in a more hawkish policy outlook. City analysts moved their expectations for the first rate hike to June, with a second potential move before December. Five-year fixed mortgage rates were already moving higher in anticipation of tighter conditions.
For the government, the Gulf conflict’s economic reverberations create a politically difficult moment. Labour’s growth strategy had been premised on falling borrowing costs and rising consumer confidence. Both are now under threat from a conflict the government can neither control nor easily insulate the economy from. Chancellor Reeves is said to be considering targeted support measures as the pressure on household finances intensifies.