BoE holds rates at 3.75% as Iran conflict stalls cuts

The Bank of England has held interest rates at 3.75% for the fourth consecutive meeting, abandoning earlier expectations of 2026 cuts as the US-Israeli war with Iran triggers a global inflationary shock.

At the start of the year, markets had priced in two rate reductions by the spring. However, the conflict has severely disrupted energy supplies, pushing up oil prices and forcing a strategic pause across major central banks.

Governor Andrew Bailey noted on 18 June that price falls following a ceasefire were "encouraging". However, he warned that four months of elevated energy costs meant "there [was] already some inflationary pressure in the pipeline". The central bank's mandate is to prevent this from becoming "sustained inflation above our 2% target".

That target remains elusive. While UK CPI dropped to 2.6% in June, down from 2.8% the previous month, the Office for National Statistics attributed the decline to temporary reductions in food and fuel costs. Fresh attacks in the Strait of Hormuz in July and a hike in the UK energy price cap on 1 July are expected to push inflation higher again.

A synchronized global pivot

For European investors, the BoE's stance reflects a broader continental shift. The European Central Bank aggressively cut its main rate from a peak of 4% in June 2024 down to 2% by June 2025. Yet the Iran conflict forced the ECB to reverse course and raise rates to 2.25% in June 2026.

The UK now sits alongside the US in a holding pattern. The Federal Reserve has cut rates three times since September 2025, bringing its target range to 3.5% to 3.75%—its lowest since 2022. Under new chair Kevin Warsh, the Fed also held rates in June, balancing political pressure for cuts against geopolitical realities.

The mortgage refinancing wall

The freeze in monetary policy has immediate consequences for UK credit markets. After peaking at 5.25% in 2023, the base rate fell through a series of cuts to 4% before reaching its current level. But borrowing costs for new customers are rising.

The average two-year fixed mortgage rate stood at 5.57% on 22 July, up from 4.83% in March. Five-year deals averaged 5.6%, up from 4.95%. This poses a severe challenge for the housing market: roughly 800,000 fixed-rate mortgages with rates of 3% or below are set to expire annually until the end of 2027.

Borrowers rolling off these historic deals will face significantly higher costs. While 500,000 tracker mortgage holders and an equal number on standard variable rates are immediately insulated from further hikes, the broader market faces a prolonged period of elevated financing costs. Savers, meanwhile, continue to benefit, with average one-year fixed savings rates at 4.27% and easy access accounts yielding 2.56%.