• The Bank of England holds interest rates at 3.75% in the wake of the economic impact of the Iran war; The Bank of England’s interest rate is what it charges other lenders to borrow money

  • Explaining today’s decision, the Bank says the conflict will cause a “shock to the economy” that will push up inflation in the near term

  • Bank Governor Andrew Bailey says restoring safe shipping through the Strait of Hormuz is key to addressing energy price rises

  • Borrowing money is not getting cheaper for individuals. Rates on new fixed mortgage deals have been rising. For savers, a few better deals have emerged

 

BoE goes hawkish as inflation outlook shifts

 

Chris Beauchamp, Chief Market Analyst at IG: “If anyone was in doubt as to how the BoE would respond to the current situation, then today is clear. A dramatic shift has taken place, and hikes are back on the table as the bank scrambles to respond to the likelihood of another inflation surge. This was all unthinkable just weeks ago, but is a sign of how the war with Iran has upended everyone’s forecasts.”

 

 

Ben Thompson, Director of Home Moving Strategy, Mortgage Advice Bureau:

 

 

“Few will be surprised that The Bank of England has held the base rate at 3.75%.

“With energy price pressures and ongoing geopolitical tensions creating  uncertainty, the bank will want clearer evidence that inflation is moving sustainably back towards its 2% target before making any further moves.

“These 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.

“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.

“If you’re within six months of your current mortgage deal ending, it’s worth locking in a new rate now. Many lenders allow you to secure a deal in advance and switch if rates fall, offering a useful ‘insurance policy’ against ongoing uncertainty.

“For those trying to understand what current rates mean for their finances and affordability, using online mortgage calculators to estimate potential monthly repayments can be a helpful starting point.

“Above all, in a market that’s constantly evolving, speaking to a mortgage expert is invaluable. They can help you understand your options, what they mean for your budget, and make sure you’re on the most suitable deal for your circumstances.”

 

 

Kevin Shaw, National Sales Managing Director, LRG:

 

The Bank of England sitting on its hands today will not come as any great surprise. Only a few weeks ago, a cut looked quite likely, but the renewed instability in the Middle East and the inflationary shadow cast by higher oil prices have clearly made Threadneedle Street a little more cautious.

That said, the housing market has so far shown a fairly British talent for keeping calm and carrying on. We are not seeing the conflict translate into any meaningful slowdown in agreed sales or new listings, and our application levels from would-be buyers are up 9% on 2025. For all the noise around inflation and geopolitics, plenty of people still want to move and, crucially, are willing to get deals done. The market remains price sensitive, as it has for the past two years, but demand is clearly present.

I view new sales agreed as the “canary in the coalmine” – they are usually the first thing to drop off if confidence really starts to crack. So far, that canary is still singing.

Of course, a rate cut would have been welcome. Buyers always prefer a tailwind to a headwind. But one hold does not redraw the map. With six MPC meetings still to come this year, there is still every chance of rates easing later in 2026, and a move on 30 April would be warmly received.

In the meantime, the property market looks less rattled than some of the commentary around it. The Bank may have delayed its long term objective of reducing interest rates, but from our perspective buyers and sellers are not delaying in their willingness to transact.

 

The European Central Bank has struck a cautious and measured tone in its latest meeting, as policymakers grapple with a renewed energy shock stemming from escalating tensions in the Middle East. While no immediate policy shift was signalled, the messaging reflects a clear shift in focus: from a disinflationary trajectory toward managing renewed upside risks to inflation.

The ECB now expects inflation to average 2.6% in 2026, revised higher from previous projections, with energy prices playing a central role in that adjustment. Core inflation is also expected to remain elevated at 2.3%, highlighting concerns that higher energy costs could begin to feed into broader price pressures across the economy. This reflects a growing awareness within the Governing Council that the current shock may not remain confined to headline inflation, but could spill over into wages, services and firms’ pricing behaviour.

At the same time, the growth outlook remains subdued. The ECB projects economic expansion of just 0.9% in 2026, underscoring the fragility of the eurozone economy even before accounting for the potential drag from higher energy costs. While domestic demand, supported by real income gains and public spending, has been a key driver of recent activity, the outlook is increasingly uncertain. A prolonged energy shock risks weighing on both consumption and investment, particularly in energy-intensive sectors.

President Christine Lagarde emphasised that the ECB remains data-dependent and meeting-by-meeting in its approach, avoiding any pre-commitment on the pace or timing of policy adjustments. Instead, the central bank is closely monitoring several key indicators, including oil market developments, supply bottlenecks, wage dynamics and firms’ pricing expectations. The ECB’s reaction function will hinge on three critical variables: the duration, intensity and propagation of the shock — in other words, how long it lasts, how severe it becomes and whether it triggers second-round effects in the broader economy.

To frame the risks, the ECB outlined two broad scenarios. In the first, energy prices rise sharply but eventually retreat, limiting the long-term impact on inflation and growth. In the second — and more concerning — scenario, energy prices remain elevated for a prolonged period, leading to more persistent inflationary pressure and a deeper drag on economic activity. The distinction between these outcomes is crucial, as it will determine whether the ECB can proceed with easing policy or is forced to maintain — or even tighten — its stance.

Importantly, Lagarde highlighted that the ECB is better positioned than during the 2022 energy crisis. Inflation expectations are currently anchored around target, policy rates are already at restrictive levels, and the central bank has improved its understanding of how energy shocks feed into second-round effects. However, she also acknowledged that the “memory” of recent inflation spikes may influence behaviour, potentially making firms and workers more sensitive to price increases.

Overall, the ECB’s message is one of vigilance rather than urgency. Policymakers are not yet ready to react decisively, but the balance of risks has clearly shifted. With inflation potentially facing renewed upward pressure and growth already weak, the central bank is navigating an increasingly narrow policy path. For markets, the takeaway is clear: the prospect of rate cuts has become less certain, and the ECB’s next moves will depend heavily on how the energy shock evolves in the coming months.

Best Regards,
Daniela Hathorn
Senior Market Analyst
capital●com


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