The Bank of England is widely expected to hold interest rates at 3.75 per cent next week, with previous plans to cut the rate put on hold over fears that the ongoing conflict in the Middle East will drive up inflation.
The war in Iran has caused oil prices to surge due to a disruption to crucial trade routes, such as the Strait of Hormuz – a key shipping route for oil – which economists say will feed through to household energy bills.
This could drive up inflation and mean the Bank, on Thursday, is likely to keep interest rates where they are – or even increase them.
Edward Allenby, senior economist at Oxford Economics, said: “The duration and severity of the energy price shock caused by the war in the Middle East is highly uncertain.
“We think the divided [Monetary Policy] Committee will be wary about the risks of making a policy error and is likely to err on the side of caution for now.”
Capital Economics has also updated its predictions to the Bank of England holding the base rate at next week’s meeting, as well as in April and June.
Paul Dales, chief UK economist at Capital Economics, said: “There are plausible scenarios in which the Middle East conflict prompts the Bank of England to delay interest rate cuts, cancel interest rate cuts or hike interest rates.
“As delay seems the most likely at the moment, we have changed our central forecast so that the Bank rate stays at 3.75 per cent at the policy meeting on Thursday, and at the meetings in April and June too.”
Oxford Economics said last week that it estimates the Middle East conflict would add 0.4 percentage points to UK inflation in 2026 because of higher oil prices, pushing up energy bills.
However, a spokesperson for the firm said it has not updated its prediction this week because the situation is “so fast-moving” and each new forecast has “a short shelf-life”.
The firm said that if the energy shock proves short-lived, there is still a chance that the committee resumes cutting base rate in April or June, but otherwise, it expects an “extended” period of the base rate being held.
The Bank of England uses its base rate to help control inflation and keep it around its 2 per cent target, as financial firms like banks and building societies use the base rate to set their own interest rates on mortgages and savings products.
If inflation is low, the Bank cuts interest rates to encourage spending in the economy, whereas if inflation is high, it raises its rate to encourage saving, easing price pressure on goods and services.
What does base rate being held mean for homeowners and buyers?
A higher base rate feeds through to mortgages, meaning mortgage costs typically increase, while savings rates also rise, benefiting savers.
Mortgage rates have been rising over the past few days, with a number of lenders withdrawing fixed products or increasing their rates by up to 0.5 percentage points.
Ken James, director at Contractor Mortgage Services, said: “With oil prices skyrocketing, it is inevitable we will have rising inflation which may force the Bank of England to keep the base rate static for longer.
“For first-time buyers, this can mean borrowing less or delaying a purchase. For homeowners coming off fixed deals, it’s another blow, as many were hoping refinancing in 2026 would be cheaper than previous years.”
David Hollingworth, director at L&C Mortgages, said that given the volatility of the market, it may be worth fixing on to a new deal now, particularly as deals can be locked in up to six months before they start.
“With such an unpredictable backdrop, those borrowers that are considering a new fixed rate deal at the moment should be looking to secure the rate sooner rather than later,” he said.
“Borrowers will need to act quickly if they are looking at a particular deal as it looks like deals will come and go rapidly until things calm down.”
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