Bank of England’s Andrew Bailey warns against early rate cuts as Iran war drives energy costs higher

The Bank of England is not in a hurry. Governor Andrew Bailey made that point clearly on June 30, signaling that interest rate cuts are off the table for now, even as pressure mounts from a conflict that has reshuffled global energy markets.

The Monetary Policy Committee voted 7-2 to keep the Bank Rate at 3.75%. Before the Iran war changed the calculus, traders were pricing in two reductions in 2026, which would have brought the rate down to 3.25%. That forecast is now shelved, with some market participants shifting to pricing in potential hikes instead.

Why Bailey is pumping the brakes

The core of Bailey’s argument is that the economic damage from the Iran conflict has not fully worked its way through to ordinary people yet. Rising oil prices, a direct consequence of the conflict’s disruption to energy supplies, are feeding into broader inflation expectations. Bailey acknowledged that inflation is still on track to hit the Bank’s 2% target, but later than originally forecast.

The typical household energy bill is expected to climb to £1,900 annually as the cost increases filter through.

The 7-2 vote tells its own story. Two MPC members were willing to cut. The remaining seven held the line.

What this means for UK households and investors

Sustained high borrowing costs hit rate-sensitive sectors hardest. Housing is the obvious one. Mortgage holders on variable rates or approaching fixed-rate renewals are facing a market where relief is further away than many had hoped at the start of the year.

Pre-war market expectations had built in a relatively benign path: two cuts, lower terminal rates, a soft landing. The shift from pricing cuts to pricing potential hikes represents a significant repricing of UK rate expectations in a short period.

Bailey emphasized the need for vigilance regarding second-round inflation effects, such as wage increases and further price rises, and indicated the Bank would act decisively if inflationary pressures permeate the economy further. He is not convinced the picture is clear enough yet to act.

The two dissenting MPC members presumably believe the economic slowdown risk outweighs the inflation persistence risk. The seven-member majority clearly think the current data does not yet justify easing.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.