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Bank of England keeps rates steady amid rising inflation concerns
The Bank of England (BoE) maintained its benchmark interest rate at 3.75% on Thursday, marking the lowest level since February 2023 but signaling potential hikes later this year due to escalating inflation risks tied to the Iran conflict.
Inflation spikes after Iran war disrupts energy markets
The UK's Consumer Prices Index (CPI) rose to 3.3% in the year to March 2026, up from 3% in February, according to the Office for National Statistics (ONS). The increase was driven by surging fuel costs, higher airfares, and rising food prices-all linked to the fallout from the US-Israel war with Iran.
The BoE's primary mandate is to keep inflation at 2%. When prices rise above target, the Bank typically raises rates to curb spending and ease price pressures. However, the current economic landscape presents a dilemma: while inflationary pressures mount, sluggish job growth and weak economic activity complicate the decision.
Uncertainty clouds future rate moves
Analysts had anticipated two rate cuts in 2026, with the first expected as early as March or April. Those projections evaporated after the Iran conflict sent oil prices soaring. Brent crude reached $126 a barrel ahead of the BoE's April meeting, following reports of renewed US strikes on Iranian targets.
Governor Andrew Bailey acknowledged the volatility, stating the Bank would "continue to monitor the situation and its impact on the UK economy very closely." He added, "Whatever happens, our job is to ensure inflation returns to the 2% target once the initial shock from the war subsides."
The BoE warned that rates could rise "forcefully" if oil prices remain elevated, with up to six hikes possible in a worst-case scenario-potentially pushing the benchmark rate to 5.5%. The next policy meeting is scheduled for June 18.
Mortgage holders brace for higher costs
Nearly a third of UK households hold mortgages, with roughly 500,000 on tracker rates directly tied to the BoE's base rate. Another 500,000 rely on lenders' standard variable rates (SVRs), which may or may not reflect BoE cuts. The vast majority-87%-are on fixed-rate deals, shielding them from immediate payment changes but exposing them to higher rates when their terms expire.
As of April 30, the average two-year fixed mortgage rate climbed to 5.79%, up from 4.83% in early March, according to Moneyfacts. Five-year fixed rates rose to 5.69% from 4.95% over the same period. The average two-year tracker rate stood at 4.61%.
Approximately 800,000 fixed-rate mortgages with rates below 3% are set to expire annually through 2027, forcing borrowers to refinance at significantly higher costs.
Credit cards, loans, and savings feel the pinch
The BoE's rate decisions ripple through the broader economy, affecting credit card interest, personal loans, and car financing. Lenders typically adjust their rates slowly, even when borrowing costs fall. Conversely, savers face diminishing returns as the base rate declines. The average easy-access savings account offered 2.47% as of April 30, per Moneyfacts.
Retirees and others dependent on savings income are particularly vulnerable to rate cuts, which could squeeze their disposable income.
UK rates remain high compared to global peers
The UK's 3.75% rate is among the highest in the G7 group of advanced economies. The European Central Bank (ECB) has cut its main rate to 2% since June 2025, while the US Federal Reserve reduced its benchmark to a range of 3.5%-3.75% after three cuts beginning in September 2025.
US President Donald Trump has criticized the Fed for delaying cuts and nominated Kevin Warsh to succeed Jerome Powell when his term ends in May. Warsh, seen as more dovish, is expected to support further reductions.
