The Bank of England’s Monetary Policy Committee (MPC) voted 8-1 to hold the Bank Rate at 3.75% at its April meeting, marking the first pause in a cutting cycle that has seen six reductions since August 2024. Governor Andrew Bailey said the conflict in the Middle East is “already feeding through into the UK economy, pushing inflation higher”, and warned that the war’s effects on global energy markets will keep the inflation outlook uncertain into the second half of 2026.
The vote and the dissent
The single dissenting vote came from Huw Pill, the Bank’s Chief Economist, who argued for an immediate increase in rates to 4%. Mr Pill warned that the risk of inflation becoming embedded in wages and prices is tilted to the upside, “potentially leading to more persistent inflation pressures in the UK economy.” His position reflects a hawkish minority view that has gained ground inside the MPC since oil prices began their sustained climb in late February.
The majority position, articulated by the Governor, was that holding rates steady at 3.75% was a “reasonable decision given economic uncertainty and instability in the Middle East.” The Committee acknowledged that monetary policy cannot influence global energy and commodity prices, but argued that its job remains to ensure the economic adjustment to those prices occurs in a way that achieves the 2% inflation target sustainably.
Inflation back to 3.3%
The latest Office for National Statistics (ONS) data published last week showed CPI inflation rose to 3.3% in March 2026, up from 3.0% in February — the highest reading in nearly a year. CPIH, which includes owner-occupiers’ housing costs, climbed to 3.4%. The driver was almost entirely energy costs: petrol prices rose 4.2% month-on-month, gas prices for households increased 2.8%, and food prices climbed 0.8% as transport and packaging costs filtered through.
The MPC’s revised projections see CPI inflation potentially reaching 3.5% in the third quarter of 2026, depending on the duration and severity of the Iran conflict’s impact on oil supply. The Bank had previously expected inflation to fall close to 2% by spring 2026, before war broke out in the Middle East in late February.
Three scenarios for the year ahead
The Bank set out three scenarios in its April Monetary Policy Report:
- Severe scenario: oil prices rise to $130 a barrel and remain elevated; inflation peaks at 6.2% in early 2027; Bank Rate could climb to 5.25% before easing.
- Persistent moderate scenario: oil prices remain elevated but below crisis levels; inflation stays around 3% through 2027 before easing toward 2% by 2028.
- Resolution scenario: oil prices peak at $108 a barrel before falling below $80 by 2027; inflation declines to 1.5% by 2028, allowing rates to fall toward 3% or lower.
Brent crude briefly reached a four-year high of $126 a barrel during the meeting week before falling back to around $115.50. The single most important variable for UK inflation in 2026 remains traffic through the Strait of Hormuz, the Persian Gulf waterway that handles approximately 20% of global crude shipments.
Mortgage rates and household impact
The pause in the cutting cycle has translated directly into mortgage market repricing. According to Moneyfacts, the average two-year fixed mortgage deal rose from 4.83% at the start of March to 5.83% by 22 April — a one-percentage-point movement that adds approximately £100 per month to a £200,000 mortgage. Five-year fixes have moved less aggressively, with most lenders maintaining headline rates between 4.5% and 5.2%.
For a typical London household with a £350,000 mortgage at 70% loan-to-value, the difference between a March renewal and an April renewal could mean an additional £175 per month in interest costs — roughly £2,100 over a year, or £10,500 over a five-year fix.
Unemployment at a four-year high
The Bank’s policy challenge is complicated by the labour market. UK unemployment rose to 5.1% in the most recent ONS release, the highest level in four years, and private-sector wage growth has slowed materially. Under normal conditions, this combination would justify deeper rate cuts. The Iran conflict has, however, pushed the inflation risk so far into the foreground that the MPC has chosen to prioritise price stability over employment support.
Next decision: 18 June
The Committee’s next decision is scheduled for Thursday 18 June 2026. Money markets are currently pricing a roughly 35% probability of a 25-basis-point cut at that meeting, with the central scenario being one further hold. A cut would require either material progress in the Middle East — particularly the reopening of the Strait of Hormuz — or a sharp deterioration in domestic demand sufficient to override the inflation concern.
For now, UK borrowers should plan on the basis that rates will stay at or above current levels into the autumn.
— Thomas Hargreaves, London Capital Post
