The United Kingdom’s economy faces a pivotal moment as 2026 unfolds, with the Bank of England’s Monetary Policy Committee (MPC) at the center of attention. The MPC’s decisions regarding its standard base interest rate have become even more critical amid new geopolitical turmoil and shifting economic indicators. The question on everyone’s mind is whether the UK will see a cut to interest rates this month or in the coming months, and if so, what factors might influence such a move.

At its March meeting, the MPC held the base rate steady at 3.75%. This decision came as no surprise to economists, who had begun predicting a hold since the escalation of the US-Iran conflict at the end of February. Previously, the prevailing expectation was that the UK would continue its trend of lowering interest rates through 2026, following a series of cuts between August 2024 and December 2025. Those cuts, occurring roughly once per quarter and each by 25 basis points, had reduced the base rate from 5.25% to 3.75% by the end of last year. However, the outbreak of war in Iran has dramatically altered the landscape, with market sentiment now suggesting that a rate hike, rather than a cut, could be in the cards.

Geopolitical events have always had the potential to disrupt economic forecasts, but the current conflict in Iran is projected to disrupt the UK economy. The impact is already evident in the wholesale energy markets, where the price of liquefied natural gas has surged. Households are bracing for an estimated 12% rise in energy bills come July, when the new price cap is implemented. These higher energy costs feed directly into inflation, which the Bank of England is mandated to keep under control. The Bank targets a 2% rate of inflation, widely regarded as healthy for economic growth, and uses interest rate adjustments as its primary lever to achieve this target.

Yet, inflation is only part of the equation. The MPC also evaluates the labor market, which currently reveals troubling signs. Unemployment in the three months to January 2026 stood at a five-year high of 5.2%, while wage growth slowed to 3.8%. Traditionally, a softer labor market would exert downward pressure on inflation, but the upward momentum in energy prices is expected to override these effects. Before the war began, the UK economy appeared poised for a rebound, with GDP growth of 0.5% in the three months to February, outpacing expert predictions. This optimism has since been tempered as the inflationary outlook worsens.

The Bank of England’s response has been cautious. In its March meeting minutes, the MPC emphasized the need to monitor the Middle East situation and its impact on global energy supply and prices. Governor Andrew Bailey reiterated in public statements that “difficult judgments” are required, marking a stark departure from the committee’s earlier language, which indicated clear intentions to cut rates in 2026. The war’s inflationary effects have forced the MPC to adopt a more flexible stance, ready to act as necessary to keep inflation on track toward the 2% target in the medium term. The Bank’s own estimates now suggest inflation will peak at 3.5% in the third quarter, primarily due to rising energy bills affecting both households and businesses.

Given these circumstances, most economists now believe that a cut to the base rate is highly unlikely in the near future. Lowering rates would only exacerbate inflationary pressures, running counter to the MPC’s mandate. The new consensus is that the base rate will remain at 3.75% for the foreseeable future. Sanjay Raja, chief UK economist at Deutsche Bank, noted that the MPC has adopted a “wait-and-see” approach, closely observing the evolving impact of the Iran war on the economy. Previously, Deutsche Bank had anticipated two rate cuts in 2026, but those forecasts have been revised. The bank now expects the base rate to remain unchanged until at least the start of 2027, while Oxford Economics predicts the first cut will not come until the third quarter of 2027.

Despite speculation about potential rate hikes, there are strong reasons to believe such increases are not inevitable. While traders have priced in the possibility of aggressive hikes, Governor Bailey and other MPC members have cautioned against jumping to conclusions. The full economic impact of the Iran war is still unfolding, and official data has yet to capture its effects. The release of March inflation data, scheduled for April 22, will provide a clearer picture, but until then, the MPC’s decisions rest on a combination of speculation and cautious analysis.

Inflation remains above the Bank’s target, with official figures indicating a 3% rate in February. The upcoming MPC meeting on April 30 will be closely watched for any shifts in policy. The constrained supply of oil through the Strait of Hormuz has pushed up global prices, affecting the cost of petrol and diesel in the UK. Data from the RAC shows that since February 28, petrol prices have risen by 25.1p per liter, and diesel by 48.6p per liter. These increases have far-reaching implications for consumer spending and business costs, intensifying inflationary pressures across the economy.

While the UK began 2026 with hopes of continued interest rate cuts, the Iran war has upended those expectations. The MPC is unlikely to lower rates in the near term, as inflation is set to rise above target and energy costs surge. Most forecasts now anticipate a prolonged period of steady rates, with cuts postponed until at least 2027. Although the possibility of rate hikes exists if inflation spikes further, the MPC’s current posture is one of caution, flexibility, and readiness to respond as more data becomes available. The UK economy, therefore, faces an uncertain road ahead, shaped by global events and domestic challenges alike.