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UK Rates to Climb as Iran Conflict Disrupts Markets
9 Mar
Summary
- UK interest rates may rise next summer, reversing earlier expectations.
- The Iran war has caused UK bond yields to surge to their highest level since April 2025.
- Rising oil prices due to the conflict are expected to fuel inflation and keep rates high.
UK interest rates are now projected to increase by next summer, a sharp departure from earlier forecasts. Financial markets suggest the Bank of England will maintain its current base rate for the remainder of 2026. Investors anticipate a potential rise to 4% by June of next year, largely due to the geopolitical impact of the US-Israel war on Iran.
The conflict has significantly altered market sentiment, with UK two-year bond yields reaching their highest point since April 2025. This surge is attributed to concerns that the war will prolong high energy prices, thereby driving up inflation across the UK and Europe. Consequently, central banks may be compelled to keep interest rates elevated.
Experts note that the minority on the Bank of England's monetary policy committee will likely view rate hikes as a rational response to imported inflation. However, there are warnings that this approach could trigger a deeper recession by dampening consumer spending, which is already under pressure from supply-driven shocks rather than demand surges.
