Financial markets have moved decisively to price in two interest rate hikes before the end of 2025 following the Bank of England’s decision to hold at 3.75% and warn of the inflationary consequences of the Iran war. The monetary policy committee voted unanimously to stay on hold, but the hawkish tone of its statement and Governor Andrew Bailey’s comments left traders in little doubt that borrowing costs could rise in June and again before December. UK gilt yields rose, the FTSE 100 fell, and the pound gained against the dollar in the immediate aftermath of the announcement.
The war between the United States, Israel, and Iran has been the catalyst for a rapid reassessment of UK monetary policy expectations. Before the conflict, markets had been pricing in rate cuts rather than hikes, reflecting a benign inflation outlook and softening economic conditions. The war changed that narrative entirely by sending global energy prices surging, threatening to push UK inflation back above 3%.
Governor Bailey was careful in his public comments, urging markets not to read too much into the decision or assume that hikes were inevitable. He described the Bank’s stance as one of watchful assessment rather than a pre-commitment to action. But his acknowledgment of rising petrol prices and the potential for higher household energy bills gave traders more than enough to work with.
The economic data published the same day showed a mixed picture. Wage growth slowed sharply in the three months to January, and unemployment rose to 5.2% — both typically indicators that would push toward rate cuts. The energy price shock from the war, however, has overridden that conventional logic, at least for now.
For analysts and investors, the key question is whether the Bank will follow through on market pricing or whether a de-escalation of the conflict could allow it to revert to a more dovish stance. The next few weeks of inflation data, combined with any developments in the Middle East, are likely to determine whether June becomes a live meeting for rate action.