Bank of England chief warns of ‘difficult judgements’ around changes to interest rates

Rates sit at 3.75% but a vote is incoming at the end of April
Bank of England (BoE) governor Andrew Bailey says there will be no rush to change interest rates , warning of “really difficult judgments” ahead to balance another surge in inflation with the wider needs of the economy.

The war in Iran has sent oil prices spiralling due to the blocking of the Strait of Hormuz, and even after a recent pullback Brent crude oil still sits close to 40 per cent higher in price than at the end of February.

That is set to feed through to higher energy prices which will mean bigger household bills and raised costs for businesses, which in part will be passed on by hiking prices of goods, including food .

Higher prices - rising inflation, in other words - are usually combatted by raising interest rates which can lower spending, stifling demand and therefore minimising price rises on the supply side, but the UK’s economic state makes that a problematic decision.

That’s due to long-standing faltering growth - aside from February’s surprise rise in GDP - and a labour market which has seen unemployment surge past five per cent.

In such circumstances, the BoE’s Monetary Policy Committee (MPC) would usually be more inclined to cut rates, which stimulates borrowing and spending.

It means a delicate balancing act for Mr Bailey and his fellow MPC voters, which will factor in “meaningful” updated economic data as well as the recent IMF warning that the UK faces the biggest hit to growth among major economies .

“There's really difficult judgments to be made,” he said to the BBC.

“We're not going to rush to judgments on those things, because there are a lot of uncertainties around this, not just how it's going to play out, but also how it's going to pass through into the UK economy .

“The faster there is a resolution to this situation - I particularly mean in terms of the supply of energy coming out of the out of the Gulf - the easier and better the outcome will be.

And that's really critical at this moment.”
With the interest rate currently at 3.75 per cent and the next vote coming on 30 April, money markets had reacted violently to the Iran war, at one point pricing in about four hikes across the year - though economists widely denied there was any real prospect of that happening.

While there is still around one raise priced into markets, it appears likely that the Bank of England will simply hold tight at the current rate for now until more is known about how the UK is impacted by the fallout from the war - including whether it actually comes to a swift resolution or not.

“Even if a peace deal is reached soon, a severe spell of stagflation looks locked in with surging energy costs expected to trigger sizeable falls in investment and consumer spending, likely leaving growth weaker than many – including the IMF –expect,” said Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW).

“Though the Iran war has shifted policymakers’ focus more towards interest rate rises than reductions, a prolonged policy pause remains most likely, particularly as the likely squeeze on growth from the conflict should help dampen inflation over time.”
Elsewhere, analysts are split over what comes next.

Yael Selfin, chief economist at KPMG, said British firms are being “hit by a double whammy of higher energy and borrowing costs” which may lead to “delaying or scaling back investment plans, as well as passing on some of their costs to consumers” in the form of price hikes.

But Lindsay James, investment strategist at Quilter, says Thursday’s unexpectedly strong economic growth numbers might provide room for a cut, while moving in the opposite direction could simply “cut off any green shoots [of economic productivity] that do survive this period”.

“The market still expects the BoE to cut at least once this year and with a fairly strong start to 2026, that may give it enough cover to do so,” she said.

“However, with growth now forecast by some to stall completely, the BoE is going to have to make a call on how much to look through any inflation spike and focus on the potential growth implications that are to follow.”
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