The Bank of England has held interest rates at 3.75 per cent for the second time in a row amid concerns about rising inflation as a result of the ongoing war in Iran.
Experts had previously expected the Bank to start cutting its base rate from this month, but economists now believe that the conflict in the Middle East will drive up inflation through higher oil and food prices, reducing the likelihood of rate cuts.
All of the nine economists on the Bank’s Monetary Policy Committee (MPC) voted to hold the rate.
The Bank said inflation will be higher in the near term as a result of the new shock to the economy, predicting that it will be near 3.5 per cent in March.
What will happen to inflation and interest rates in future?
The base rate reached its peak of 5.25 per cent in August 2023 in response to high inflation and has slowly been edging down since then.
Before the conflict in the Middle East began, economists had widely predicted that the base rate would be cut by 0.25 basis points today, with further cuts likely later in the year.
But markets are now expecting an increase to rates in June as inflation is likely to spike over the next few months due to higher oil prices which have shot up by more than 20 per cent today.
Brent Crude, the benchmark oil prices, was around $118 (£89) a barrel on Thursday, over 50 per cent higher than before the war began on 28 February.
Oxford Economics said that in a worst-case scenario where oil prices rise to $140 per barrel, inflation could hit 5 per cent in the final three months of 2026, potentially forcing the Bank to increase interest rates again.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said: “If current prices are maintained, higher energy prices would push to a little above 4 per cent by the end of the year.
“However, that likely understates the total impact as second-round effects would become more likely and larger if energy prices were still this high into the summer, which could realistically push inflation towards 5 per cent. At that point, interest rate hikes become much more likely.”
The Bank uses its base rate to help control inflation and keep it around its 2 per cent target, as financial firms like banks 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.
“The Bank of England’s best laid plans have been severely disrupted by recent global events, with war in Iran likely to have slammed the brakes on any rate cuts for the foreseeable future,” said Duncan Ferris, analyst at investment platform Freetrade.
“The MPC was narrowly split in February, but signalled rates were likely to fall further this year as they expected inflation to be reined in to the 2 per cent target level in spring. But things have changed, with the conflict in the Middle East throwing a significant spanner in the works.
“This means household budgets may remain under strain, with relief in the form of cheaper loans and mortgages likely still some way off.”
What does the base rate being held mean for mortgages?
Mortgage lenders and savings providers use the base rate to set their own interest rates, and they often increase or reduce their rates in anticipation of what might happen to the base rate in future.
If the base rate is set to rise or remain on hold, mortgage costs typically increase, while savings rates also rise, benefiting savers. If the rate is predicted to fall, lenders typically start offering cheaper mortgage deals, while savings rates can fall.
Mortgage rates have been gradually coming down in line with the falling base rate over the past year, but rates started rising drastically in the past few weeks. The average rate is now back above 5 per cent, with all fixed deals under 4 per cent taken off the market earlier this week.
Nick Mendes of brokers John Charcol said: “For borrowers, the message is simple. The market may still improve over time, but the path down now looks slower, bumpier and more dependent on events outside the UK.
“That does not automatically mean mortgage rates move sharply higher from here. It does, however, make near-term falls look less likely unless market sentiment improves and funding costs settle back down.”
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.”
What does the base rate being held mean for savings?
The base rate also affects the interest rates set on credit cards and loans, so a higher base rate can make borrowing money more expensive.
Tamsin Powell, consumer finance expert at Creditspring, said: “While much of the focus is on mortgages, higher interest rates are feeding through into the wider cost of borrowing – from credit cards to overdrafts – making it more expensive for households to manage everyday shortfalls.
“At the same time, inflation continues to keep essential costs elevated, meaning many families are being squeezed from both sides.”
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