The Iran war may have marked the end of an era for UK monetary policy, with the Bank of England voting unanimously to hold rates at 3.75% on Thursday and warning that the conflict’s energy price impact had replaced the anticipated rate-cutting phase with the possibility of a new tightening cycle. The monetary policy committee described the war as a significant turning point that had disrupted a relatively benign monetary policy environment and introduced competing pressures that may define UK rate decisions for the foreseeable future. Officials warned that inflation could rise above 3% and that borrowing costs might need to increase.
The era that may have ended was characterised by gradually declining rates as the Bank worked through the aftermath of its tightening cycle in response to the 2022 inflation shock. By early 2025, the Bank had been cutting cautiously, and the expectation was for this process to continue through the year as inflation settled sustainably toward target. The war has interrupted that process and potentially reversed it, marking a potential shift from the post-tightening easing phase to a new period of uncertainty and possible re-tightening.
Governor Andrew Bailey did not use language as dramatic as end-of-an-era in his public communications, focusing instead on the immediate policy challenge and the Bank’s conditional readiness to act. However, the substance of his warnings — about the persistence of the inflation risk, the elevated price forecast throughout 2026, and the potential need for rate hikes — was consistent with a view that the policy environment had changed in a lasting rather than temporary way.
Financial markets processed the changed era with swift repricing. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders adjusted to what they perceived as a fundamentally different monetary policy phase. Analysts revised their multi-year rate forecasts, pushing back the expected return to lower rates and incorporating the potential for a new tightening cycle.
For UK households and businesses that had been planning for the previous era — one of declining rates and gradually improving financial conditions — the potential end of that era requires a fundamental revision of financial expectations. The adjustment to a world where rates may rise rather than fall, and where the return to more accommodative conditions has been pushed back, will take time and will impose real financial costs on those least able to adapt.