Inflation is projected to hit 3.5 per cent, up from two per cent, in the third quarter of 2026 due to the “conflict in the Middle East significantly shifts the outlook” from the Bank of England.
The central bank has revised its forecasts for the consumer price index (CPI) rate in response to the US-Iran war, with the UK energy market now in line for an “inflationary shock”.
This afternoon, the Bank’s nine-member Monetary Policy Committee (MPC) unanimously voted to keep the base rate at 3.75 per cent in a blow to borrowers.
With this decision, a potential interest rate cut from the Bank of England in 2026 now appears unlikely, as inflationary pressures are predicted to persist throughout the year.
Inflation is now projected to hit 3.5%, the Bank of England
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Sarah Breeden, deputy governor of the Bank of England, shared: “Conflict in the Middle East has significantly shifted the outlook for inflation. Absent this shock, the underlying disinflation process had continued broadly as I expected, and, consistent with my vote in February, I would have expected to vote for a cut again in March.
“But the conflict will have a significant, though at this point highly uncertain, impact on inflation. I associate myself strongly with the MPC’s collective assessment and communications at this meeting.
“Monetary policy cannot influence global energy and commodity prices, but it can, and it must aim to ensure that the economic adjustment to them occurs in a way that achieves the two per cent target sustainably.
“How that adjustment occurs is hugely uncertain, with risks to both sides, and I vote to hold at this meeting. The Committee will learn more by its April meeting about the scale and duration of the shock, as well as its possible second-round effects, and so the implications for monetary policy.”
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In reaction to the forecasts, Nick Saunders, CEO of online investment platform Webull UK, said: “Uncertainty has unsettled the markets and a cautious Bank fosters a sense of prudence that may help calm investors.
“A low interest rate environment is beneficial for taxpayers and businesses alike, but the risk of inflation is a more important battle at this point. The Bank cannot afford to fight a battle on two fronts.
“We are anticipating cuts this year and into 2027, but the Bank’s ability to do this is dependent on external factors. No one wants a return to 10% inflation, and that is the focus. A unanimous vote from the committee underpins this prudent determination; the consensus had been for a split decision, but unanimity sends a strong message.”
Sam Coyne, Europe CEO at cross-border payments company Currenxie, added: “Inflationary pressure looks set to rise this year as the war in the Middle East and ongoing supply chain disruption continues to spike energy prices as well as the cost of consumer goods.
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“Holding interest rates is one of the clearest signs yet that the market is expecting the much-anticipated drop in inflation to the Bank’s two per cent target to be pushed back. As a result, price hikes impacting both consumers and businesses are likely to be inevitable in the short-term which will ultimately curb UK economic growth.
“Businesses are facing huge uncertainty at the moment – many will have factored in expected interest rate cuts and falling inflation into their growth strategies this year, those plans have now been upended.”
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