The Bank of England (BoE) has chosen to hold interest rates at 3.75% in the wake of the economic impact of the war in the Middle East.

Before the US-Israel conflict with Iran, financial markets had been anticipating a cut in the central bank’s base rate this month, but amid spiralling oil prices the BoE has confirmed it has now held off such a move.

When the BoE’s Monetary Policy Committee (MPC) met at its February meeting to decide the base rate, the nine members voted in a five to four split in favour of holding rates, with four members preferring a cut.

At the MPC’s meeting this week, however, all nine members voted unanimously to maintain rates at 3.75%, keeping them at their lowest level since February 2023.

In its report published today, the MPC said the conflict in the Middle East has caused a “significant increase in global energy and other commodity prices”, which will affect households’ fuel and utility prices, and have indirect effects via businesses’ costs.

The Committee warned that inflation will be “higher in the near term” as a result of the new shock to the economy.

“The MPC is alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting, the risk of which will be greater the longer higher energy prices persist,” the MPC report said.

“The Committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices.”

In the mortgage market, managing director of Alexander Hall, Richard Merrett, said the recent developments in the Middle East had “already been reflected within the market”, with swap rates edging up and some lenders reducing product availability as they respond to short-term market movements.

“Against that backdrop, today’s decision to hold the base rate should provide reassurance for borrowers that the broader outlook remains one of stability,” Merrett commented. “While the market has adjusted in response to recent movements, the medium-term picture for borrowing costs is still far more predictable than it was a year ago.”

Director of home moving strategy at Mortgage Advice Bureau, Ben Thompson, said that the external pressures could mean the first cuts “take longer to arrive than many had hoped”.

“Rate movements can feel unsettling, but mortgage markets often price in expectations well in advance, meaning the impact on new deals may be less significant than many fear,” Thompson said.

“For homebuyers and current homeowners, the key message is not to panic. Focus on understanding your options rather than rushing into decisions, particularly in this fast-moving market.”

Group lending distribution director at OSB Group, Adrian Moloney, added: “With affordability still stretched for many households, greater clarity on the outlook for interest rates will be just as important as when and how quickly any future reductions may come. Mortgage pricing continues to respond quickly to wider market volatility, meaning borrowers and lenders alike are still navigating a changing rate environment

“That means more borrowers may begin to revisit plans that were put on hold, particularly homebuyers and movers who have been waiting for a more stable rate environment before committing.”

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