BoE to hold at 3.75% as Gulf conflict stalls rate cuts
The Bank of England is set to keep rates unchanged for a fifth straight meeting as Middle Eastern instability pushes up energy costs and forces lenders to raise mortgage pricing.
The Bank of England’s Monetary Policy Committee is widely expected to hold the benchmark rate at 3.75% when it announces its decision at 12:00 BST. This would mark the fifth consecutive pause, leaving rates at their lowest level since February 2023.
The hold is driven by escalating geopolitical risks rather than domestic economic weakness. Conflict in the Gulf and the absence of a lasting truce have driven up wholesale energy prices. This triggered a 13% rise in domestic energy bills across England, Scotland, and Wales in July, pushing inflation up from the 2.6% recorded in June.
While the MPC’s primary tool is to manage inflation back to its 2% target, external price shocks from the Iran war are limiting its options. Analysts now anticipate that the next movement in rates could be an increase, rather than a cut.
Financial markets are already pricing in this tighter outlook. While tracker mortgage holders will see no immediate change, more than eight in ten UK mortgage customers are on fixed-rate deals where lenders are independently raising pricing. The average two-year fixed deal has climbed to 5.62%, the highest in over a month.
"A hold is still welcome, but market expectations will need to ease back before we can hope for a return to lenders cutting rates," said David Hollingworth of mortgage broker L&C. Banks are raising their rates to cover increased funding costs tied to Middle East volatility, typically moving as a pack to avoid a surge in applications.
The divergence between a steady central bank and rising retail mortgage costs highlights the ongoing friction in the UK housing market. BoE projections indicate that more than five million homeowners will see their monthly repayments increase by the end of 2028.
The shifting rate dynamics have, however, created a rare advantage for savers. Fixed-term savings rates have hit their highest levels in nearly two years, with the top one-year bond offering 4.91%, a peak not seen since October 2024. "This rare dose of good news for savers is somewhat of a silver lining after years of poor real returns," said Rachel Springall of Moneyfacts.
"A new government finding its feet, and the situation in the Middle East becoming increasingly uncertain, mean that a hold on [the] base rate decision would be a welcome dose of stability," said Katie Horne from savings platform Flagstone. "People have had more than enough uncertainty over the past year, and even a temporary pause eases the pressure a little."
