On 19 March 2026, the Bank of England unanimously voted to keep the bank rate at 3.75%. In early February 2026, markets predicted an 80% chance that the Bank of England would lower the bank rate in March, citing the relative stability of the market and modest increases in property listings and exchanges. Yet these expectations were dashed on 28 February when the outbreak of war in the Middle East precipitated a global energy crisis.
According to the Bank of England, a major consequence of the war is that inflation could rise to 3.5% over the next two calendar quarters. Thomas Pugh, the chief economist at RSM UK, predicted that inflation could reach as high as 5% if energy prices continue to rapidly rise.
Holding the Bank Rate
Inflationary concerns stood as the primary consideration behind leaving the bank rate at 3.75%. Because of the volatility of the global energy market, the Bank of England has revised the CPI inflation for the second quarter from 2.1% to approximately 3%. Likewise, investors are now betting that borrowing costs could reach as high as 4.5% before 2027.
Clare Lombardelli, the deputy governor of monetary policy at the Bank of England, explained: ‘The conflict in the Middle East will be damaging for the UK economy, increasing inflation and reducing output. We are early in the process of assessment. The shock will have direct effects such as higher fuel and utility prices; indirect effects on business energy and transport costs; and broader second-round effects as the shock transmits through the economy impacting demand, supply, expectations of inflation, wage-setting and pricing behaviour.’
Andrew Bailey, the governor of the Bank of England, echoed the sentiment that a ‘prolonged disruption to the supply of oil, natural gas and other commodities such as fertiliser and helium gas increases the upside risk to inflation.’
Although Bailey reaffirmed the commitment that ‘inflation remains on track to meet 2% target in the medium term’, there was an emphasis that the Bank of England would ‘stand ready to act as necessary.’
Several Monetary Policy Committee members have alluded to the prospect that the bank rate could increase if the economic situation continues to worsen. Catherine Mann, an external member of the Monetary Policy Committee, commented that she is ‘considering a longer hold or even a hike at some point to lean against inflation persistence’.
Similarly, Swati Dhingra, another external member of the Monetary Policy Committee, argued that the risk of higher borrowing costs ‘could warrant a hold or increase in the bank rate.’
Industry Reaction
Underpinning the March meeting was the theme of caution. Although the Bank of England has reaffirmed its commitment to hit the 2% inflation target, there is nevertheless a wave of speculation regarding the trajectory of inflation and interest rates.
Colin Bradshaw, the CEO at TwentyCi, said: ‘The Bank of England’s decision to maintain the base rate at its current level was widely expected and reflects a cautious strategy in the current uncertain climate. The ongoing volatility in the Middle East has undoubtedly added a layer of complexity and the Bank is likely wary of cutting too soon and risking an inflationary rebound that could undo the progress made over the last year.’
Many of the assumptions are predicated on the anticipated timeline of the ongoing war in the Middle East. ‘The timeline on the conclusion of the war,’ Oliver Prior, the managing director of Auction House, observed, ‘will determine the health of the global economy for some time, and for now it feels like the Bank of England is taking a wait and see approach to the management of the base rate.’
Prior concluded that the UK is ‘likely to see an increase of interest rates as a consequence of the climbing price of oil due to the challenges around shipping via the Strait of Hormuz.’
At this time, the global energy crisis has not had a major impact on the key property market metrics, with Amy Reyonds, the head of Sales at Antony Roberts, observing: ‘[W]e are not currently seeing a material impact on pricing or transaction levels. Although the recent uptick in mortgage rates is unlikely to be welcomed, demand remains resilient, particularly for well-priced, high-quality homes.’
Yet this should not rule out the long-term ramifications of the conflict in influencing the UK property market. As Matt Smith, a mortgage commentator at Rightmove, pointed out, ‘even the small rises in rates can have a real impact on monthly budgets, and lenders are very aware of that.’
Overall Strategy
Considering the high volatility and speculation surrounding the ongoing Iran War, it is widely accepted that the Bank of England has adopted a wait-and-see strategy. This posture will enable the Bank of England to flexibly approach the bank rate.
This approach, however, has consequently dampened expectations that the bank rate will be lowered in the short term. Further still, the prospect that the bank rate could be increased is beginning to enter the bank rate discourse, subject to the further developments of the Iran War.
