Iran War Clouds UK Rate Cut Hopes as Bank of England Faces Energy Price Shock

Analysts warn that UK interest rates — currently at 3.75% — could reverse course and climb back above 4% as the Strait of Hormuz crisis drives global energy prices sharply higher and upends Britain’s economic recovery.

The fast-evolving war involving Iran has thrown the United Kingdom’s economic outlook into sharp uncertainty. Analysts are warning that interest rates could be pushed back above 4% if energy prices continue to climb — a dramatic reversal for a central bank that had been cutting borrowing costs steadily since August 2024. The Bank of England’s base rate currently stands at 3.75%, reduced six times from a peak of 5.25%.

Britain’s Treasury chief Rachel Reeves sought to present an optimistic picture of the UK economy on Tuesday, even as oil and gas prices soared and shares slid in the wake of the Iran conflict. Unveiling the latest forecasts from the independent Office for Budget Responsibility, she insisted her policies are bearing fruit. Though economic growth this year is expected at 1.1% — lower than November’s budget prediction — the OBR projects it will recover to 1.6% in both 2027 and 2028. Inflation and borrowing are expected to fall more quickly than previously thought. But economists cautioned that the Iran war could upend those forecasts, depressing growth and stoking inflation.

Rate Cut Expectations Collapse

Only a week ago, markets were pricing in an 86% probability of a Bank of England rate cut at its March meeting — a near-certainty driven by cooling inflation, rising unemployment, and weak growth. Now, following the US and Israeli strikes on Iran that killed Supreme Leader Ali Khamenei, those expectations have collapsed entirely. Markets are currently assigning less than a 5% chance of a rate cut this month and less than a 50% probability of a move in April. The Bank’s next scheduled decision is on 19 March.

New analysis by the National Institute of Economic and Social Research (NIESR) warns that the Bank may be forced to raise borrowing costs again if the conflict pushes energy prices sharply higher. NIESR modelled two scenarios: if the energy price spike is temporary and normalises within three months, UK CPI inflation for 2026 would rise by roughly 0.3 percentage points. But if elevated prices persist for a full year, inflation could climb 0.7 percentage points this year and a further 0.5 points in 2027 — potentially forcing rates back above 4%. Mortgage lenders have already begun suspending planned rate reductions in response.

Energy Markets: The Numbers Behind the Shock

The Strait of Hormuz — through which approximately 20% of the world’s oil and gas exports pass daily — has effectively stalled since the conflict began on 28 February. Iran’s IRGC has threatened to attack any vessel attempting passage, and approximately 200 tankers are currently stranded in surrounding waters. UK wholesale gas prices have surged around 40% in recent days. Brent crude has approached $83 per barrel, up roughly 15% since the start of the conflict.

Goldman Sachs raised its Q2 2026 Brent crude forecast by $10 to $76 per barrel on average, but warned that five more weeks of Hormuz disruption could push prices to $100 per barrel — a level associated with significant demand destruction. JPMorgan estimates that supply losses of up to 4.7 million barrels per day could follow if the strait remains closed. Qatar, one of the world’s largest LNG producers, suspended production entirely after Iranian drone strikes on its Ras Laffan facilities, sending European gas futures surging.

UK Economic Indicators — Snapshot (March 4, 2026)

One Million Homeowners in the Crossfire

The immediate casualty of the rate-cut reversal is the UK mortgage market. Approximately one million homeowners are currently rolling off fixed-rate deals secured before interest rates began climbing in December 2021 — they had been counting on further Bank of England cuts to ease the cost of new deals. That expectation has now been sharply revised. Mortgage lenders have already begun suspending planned reductions to home loan rates in response to the conflict.

Riz Malik, director at R3 Wealth, warned: “Last week, the outlook was promising for the 1.8 million mortgages up for renewal in 2026. Today, we could see major volatility in the mortgage market with the outlook for further cuts disappearing by the second.” Justin Moy of EHF Mortgages added that in the short term, “any talk of base rate cuts will be null and void.” Swap rates — which underpin fixed-rate mortgage pricing — have risen sharply as gilt yields climbed.

What Happens Next? Duration Is Everything

Economists broadly agree that the trajectory of the economic shock depends almost entirely on one variable: duration. A disruption lasting only days can be absorbed through strategic reserves and rerouted shipping. But a sustained closure of the Strait of Hormuz lasting two weeks or more would represent an unprecedented peacetime supply shock, potentially triggering recession in oil-importing nations and embedding a prolonged inflation surge across Europe and Asia.

There are tentative signals of diplomatic movement. A New York Times report on Wednesday cited Iranian operatives reaching out to discuss terms for ending the conflict, causing European gas futures to drop as much as 12% in a single session. President Trump has also stated that the US Navy will escort tankers through the strait if necessary, providing government-backed insurance. These developments have offered some relief to markets, though Brent crude continued to rise. The Bank of England’s 19 March decision will now be watched as a critical gauge of how seriously policymakers view the inflation threat.