The Bank of England (BoE) Monetary Policy Committee (MPC) has unusually voted unanimously to hold its base rate at 3.75% on the back of major geopolitical issues in the Middle East.
All members of the MPC voted to hold the base rate in the meeting on 18 March 2026.
The committee said its primary cause for caution on rates was the unfolding war and regional crisis in the Middle East, where much of the world’s supply of oil and gas emanates from.
Since the onset of the war, the MPC warned that oil and gas prices are both up 60% with no end in sight.
The problem for rate setters is that energy price spikes such as this directly affect inflation – but there is little they can do to influence the issue.
As such the committee took the decision to hold its main rate of interest at 3.75% in order to wait and see how long the crisis persists for.
At the meeting, Governor Andrew Bailey remarked: “Large movements in energy prices have resulted from events in the Middle East and uncertainty over the duration of supply disruptions. Monetary policy cannot reverse this shock to supply. Its resolution depends on action taken at its source to restore the safe passage of shipping through the Strait of Hormuz.
“Monetary policy must, however, respond to the risk of a more persistent effect on UK CPI inflation. A prolonged disruption to the supply of oil, natural gas and other commodities such as fertiliser and neon gas increases the upside risk to inflation. The recent experience of high inflation may also make households and businesses more sensitive to a new inflationary shock.
“At the same time, the starting point for this shock is a real economy with limited pricing power. Holding Bank Rate at this meeting is appropriate. I will be monitoring developments extremely closely and stand ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term.”
UK economy
The oil shock comes at a difficult moment for the UK economy, where inflation remains above the 2% target, while the labour market is still struggling alongside GDP growth. Wages are also now only just keeping ahead of inflation at 0.5% real-terms growth.
The Bank of England was set to cut the base rate twice in 2026, but the onset of the war has upended these expectations, with markets now pricing in up to two hikes instead this year. The effect has already been felt in the mortgage market where average rates have risen by over 40 basis points (4.78% to 5.20%) according to Moneyfacts.
However, financial markets are still trying to figure out what is happening and its long-term implications. There is a great deal of uncertainty which to an extent makes the MPC’s decision to wait and see justified.
If you have any questions or concerns about the current economic backdrop and how it pertains to your own long-term financial plans, don’t hesitate to get in touch for a chat.