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Bank of England warns that Iran war will bring inflationary pressures, higher interest rates and weaker growth

ended 01. April 2026

The Bank of England has warned that global economic risks have increased due to the Middle East war.

Following the onset of the conflict, shipping through the Strait of Hormuz, a major channel for global energy and commodity transport, has effectively ceased. 

Energy production in the Gulf region has fallen, in part reflecting attacks on key infrastructure, which could require an extended period of time to repair. 

These developments led to much higher and more volatile energy prices, and represented a negative supply shock to the global economy, bringing the potential for inflationary pressures, higher interest rates and weaker growth.

Rising oil and gas prices are expected to push up UK inflation and borrowing costs, putting pressure on households and businesses.

Higher rates and uncertainty have already pushed mortgage costs up and reduced the number of available products, affecting borrowers.

  • What is your reaction to Bank of England's outlook?
  • Are they going to raise their base rate this year?
  • How damaging will that be for the UK economy?

Responses asap.

5 responses from the Newspage community

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Editor
Graham Nicoll
Financial Planner, Chartered FCSI at NCL Wealth Partners
The warning from the Bank of England highlights a classic supply shock with the disruption in the Strait of Hormuz pushing up energy prices, which risks higher inflation alongside weaker growth.

This puts the Bank in a difficult position. If energy-driven inflation proves persistent, further rate rises this year are possible, and arguably probable, but they’ll be cautious given rising borrowing costs for individuals and businesses, and slowing activity.

For the UK economy, the impact is likely to be a squeeze rather than a collapse as households face higher bills and borrowing costs, while businesses deal with rising inputs and weaker demand. The longer the disruption lasts, the more damaging it will become.
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Tony Redondo
Founder at Cosmos Currency Exchange
The Bank of England is caught between ‘a rock and a hard place’ in a classic stagflationary trap. By highlighting the closure of the Strait of Hormuz and damaged energy infrastructure, the Bank acknowledges a severe "negative supply shock" that they cannot control with domestic policy. This creates a "perfect storm" with rising energy costs driving inflation up while simultaneously stifling growth. While markets previously expected at least two rate cuts to take rates towards 3% in 2026, it now expects two rate hights up towards 4.75%, a massive 1.75% shift. The damage to the UK economy is becoming structural. Higher rates have pushed average mortgage costs toward 6%, squeezing household disposable income. Combined with a record low in business confidence and a collapse in projected GDP growth to near 0.4%, the UK faces a "cost of living crisis 2.0." Raising rates is now a high-risk gamble. It may stabilize the pound, but risks pushing an already fragile economy into a deep recession.
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Adam Pickett
Independent Financial Adviser at McLaren Capital
The outlook should be of no great surprise to anyone, the disruption in the Middle East is causing ructions in oil markets not seen since Russia invaded Ukraine. However, it's important to remember that that crisis also coincided with an enormous domestic spending package and covid era handouts that pushed up core inflation. The Bank appears to be placing a lot more emphasis on the core inflationary figures (a reduced basket of goods that excludes more volatile things, such as energy). I anticipate the Bank to view these shocks as external and recognise that increasing rates to put the brakes on an already very slow economy would likely have very little effect, although I imagine that on the flip side, they also would be reluctant to continue cutting if inflation is rising, regardless of the source.
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Phil Ingle
Managing Director at Phil Ingle Associates
Rising inflation is pretty much baked in, so our expectation must be that the Bank of England will use the only tool they have - increasing interest rates - at some point this year. In the short term, people will dislike rising fuel prices less than they would dislike an interruption to supply, so expect oil and gas to continue to move upward. On the plus side, increased energy prices may focus people's minds on being more efficient with energy use, which is good for the planet. I noted Rachel Reeves' responses on Breakfast TV today about how increasing fuel prices also help the government's tax take, possibly reducing the UK's government spending deficit. Alongside fuel and interest rates, we will also have to keep an eye on unemployment. The spectre of stagflation - rising inflation combined with unemployment - must be a prospect too.
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Colette Mason
AI Ethics Consultant at Clever Clogs AI
The Bank of England is describing an energy shock hitting an economy that has quietly made itself more exposed than most. The UK is one of the most service-dependent economies in the developed world, and services is where AI adoption is running fastest.

ONS data puts AI adoption in the UK services sector at 9%, nearly double manufacturing. That's not a cushion. That's a concentration risk.

Rate rises don't hurt equally. They land hardest on households whose jobs are already being quietly reshaped: admin, customer service, financial processing. Job postings for high AI-exposure roles dropped 38% faster than low-exposure ones between 2022 and 2025, according to gov.uk. These are the same people stuck on variable rate mortgages with no margin for error.

The Bank can model inflation. What nobody seems to be modelling is what happens when cost-of-living pressure and structural labour market change arrive in the same household at the same time. Someone needs to start.