Bank of England holds rates at 3.75% amid geopolitical tensions
In brief
- MPC voted 9-0 on March 19 to hold Bank Rate at 3.75%, marking rare internal unity
- Strait of Hormuz tensions in March 2026 drove energy price surges globally
- Governor Bailey: monetary policy cannot offset geopolitical supply shocks directly
- Inflation could exceed 6% under adverse scenarios, eroding real rates
- Investor positioning for rate cuts now paused indefinitely
Geopolitical shock derails rate-cut expectations
Before the Iran conflict erupted in March 2026, markets were pricing in rate cuts as the UK economy cooled and inflation moderated. The Strait of Hormuz, through which a significant chunk of global oil transits, became a conflict zone, causing energy prices to surge. That supply shock reshaped the entire rate outlook in weeks.
The 9-0 vote in March was extraordinary. The MPC's unanimous vote to hold rates marks a dramatic shift from its usual internal divisions. By the April 30 meeting, cracks appeared—the committee voted 8-1 to maintain rates, with Chief Economist Huw Pill casting the lone dissent arguing for a 25-basis-point hike.
Supply shocks and real rates
Governor Andrew Bailey acknowledged that monetary policy cannot directly counteract supply shocks. Rate hikes can't lower oil prices or restore supply chains. But inaction carries its own risk. The Bank of England's own forecasts show inflation potentially exceeding 6% under adverse scenarios. If that materializes, holding rates at 3.75% would mean real interest rates are deeply negative—a condition that typically erodes savings and fuels further price pressures.
The pause in rate cuts
The rate-cutting cycle many investors had positioned for is, at minimum, on pause. That shift has rippled through sterling and gilt markets, lifting borrowing costs for UK households and businesses. The MPC faces an asymmetric problem: tighten too much and risk deepening recession; stay put and risk inflation running hot if energy shocks persist. For now, the committee has chosen to hold ground and watch.
