Bank holds interest rates but says it is ready to raise them if Iran war escalates
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- Bank of England held interest rates at 3.75% for a fifth consecutive meeting, but Governor Andrew Bailey warned that if the Iran war persists and oil stays above $100/barrel, "the odds are that interest rates will have to go up higher."
- MPC dissent widened, with three of nine members voting to raise rates to 4% — one more dissenter than at the previous meeting — with one member explicitly citing the collapse of the US-Iran memorandum of understanding.
- UK inflation path: In a worst-case scenario with oil at $100/barrel, inflation could peak at 3.2% in 2026, slightly lower than the Bank's prior 3.5% projection; growth is now forecast at 1.1% this year, ahead of April estimates.
- UK inflation eased to 2.6% in the year to June during a brief lull in US-Iran hostilities, but Bailey warned the conflict will push prices back up before returning to the 2% target.
- MPC member Megan Greene flagged inflation risks beyond oil: Houthi attacks on Red Sea tankers creating a second energy choke point, a potential "super El Niño" driving up food prices, and microchip market disruptions.
- Mortgage squeeze: Borrower Priya Kapadia, approaching the end of a 5.5%+ fixed deal, said she can save only £10-20/month if rates stay at 3.75% but up to £150 if they fall further, with bills for gas, electricity and council tax already up.
Why it matters: UK borrowers hoping for rate relief face a knife-edge: markets expect US-Iran tensions to ease before autumn US elections, but Bailey tied hikes to oil above $100, and three MPC members already voted to raise. A continued war puts the wave of expiring fixed-rate mortgage deals — like Kapadia's 5.5% deal coming up for renewal — directly at risk.
