Bank of England Holds Interest Rate at 3.75%
Citing Middle East Conflict and Energy Price Surge
On March 18, 2026, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to maintain the Bank Rate at 3.75%. The decision marks a critical pivot for the central bank, driven by a sudden global energy shock sparked by escalating conflict in the Middle East that has disrupted the UK’s recent disinflationary progress.
Global Conflict Triggers Commodity Shock
The primary catalyst for the MPC’s decision is the recent outbreak of conflict involving Israel, the United States, and Iran, which has targeted energy infrastructure and severely impacted shipping through the Strait of Hormuz. Because around one-fifth of global oil and liquefied natural gas flows through this strait, the disruption has led to a sharp rise in both the level and volatility of energy prices.
In the run-up to the March meeting, Brent crude spot prices surged to over $100 per barrel—a 60% increase since February and the highest level seen since 2022. European wholesale gas prices similarly jumped by 60% to over €50 per MWh. The conflict has also placed upward pressure on other essential commodities, including fertilizer and neon gas.
Inflation Rebound Delays 2% Target
Prior to these geopolitical events, the UK was experiencing continued disinflation, with twelve-month CPI inflation falling to 3.0% in January. However, the sudden spike in energy costs is expected to delay the Bank’s expected return to its 2% inflation target.
The immediate effect of higher fuel prices means CPI inflation is now projected to hit close to 3.5% in March. Preliminary estimates from Bank staff indicate that inflation will likely hover between 3% and 3.5% over the next couple of quarters. Furthermore, if wholesale gas prices remain elevated, they will likely feed into a higher Ofgem price cap for household utility bills starting in July.
A Stagnant Domestic Economy
This inflationary shock arrives at a time when the UK economy is already experiencing sluggish growth. UK GDP expanded by a mere 0.1% in the final quarter of 2025 and remained flat in January 2026. Labor demand remains weak, with the unemployment rate holding at 5.2%.
The MPC warned that the new energy shock will squeeze real incomes through higher household fuel and utility costs. This squeeze could erode consumer and business confidence, increase precautionary savings, and lead to a more rapid rise in unemployment, further weighing on economic demand.
The MPC’s Policy Dilemma
While the Bank of England acknowledges that monetary policy cannot influence global energy prices, it aims to manage the economic adjustment to sustainably achieve the 2% target. The committee is highly alert to the risk of “second-round effects,” in which sustained high energy prices embed domestic inflationary pressures into wage and price-setting behavior.
The tension between rising inflation and softening economic activity has significantly altered the MPC’s outlook. Notably, several committee members, including Sarah Breeden and Dave Ramsden, revealed that, absent the Middle East conflict, they would likely have voted for a 25 basis point interest rate cut at this meeting due to the ongoing disinflation. Instead, facing massive uncertainty regarding the scale and duration of the geopolitical shock, all members agreed that a hold at 3.75% was the most prudent course of action to assess incoming data.
The Committee remains vigilant and stated it “stands ready to act as necessary” to ensure inflation remains on track to meet its medium-term target.