Investors are now pricing in a roughly 75 percent likelihood of a quarter point interest rate increase from the Bank of England by the end of the year, up sharply from Tuesday’s levels, following US President Donald Trump’s remarks declaring that the ceasefire between the United States and Iran is over. Trump had called Iranian forces “dirty players” and “scum,” and said the US had “attacked very powerfully” against Iran overnight, sharply escalating rhetoric around the conflict.
The shift in rate expectations reflects renewed concern that a resumption of hostilities in the Gulf could push energy prices sharply higher again, reviving inflation pressures the Bank had hoped were beginning to ease. The Bank of England has held its Bank Rate at 3.75 percent since June, with the Monetary Policy Committee voting 7-2 to hold at its last meeting, with two members, Megan Greene and Huw Pill, dissenting in favour of a hike to 4 percent. UK CPI inflation held at 2.8 percent in May, still above the Bank’s 2 percent target, while services inflation, a key concern for policymakers, has risen to 3.7 percent.
Bank of England officials have repeatedly flagged that ongoing disruption to global energy supply from the Middle East conflict remains the key swing factor for the UK inflation outlook. The Bank had previously noted that global energy prices had eased somewhat following the earlier ceasefire agreement between the US and Iran, but warned that prices remained elevated and unstable compared with pre-conflict levels, and that inflation was still expected to rise later in 2026 as earlier energy cost increases continue to feed through the economy.
With Trump’s latest comments raising the prospect of a fresh escalation and another spike in oil prices, similar to the jump already seen in Brent and WTI crude following the remarks, markets are now leaning toward the view that the Bank will need to raise rates to contain the inflationary fallout rather than hold steady as previously expected. The Bank’s next scheduled interest rate decision is due on July 30, alongside a new Monetary Policy Report that will offer a fuller picture of how policymakers are weighing the risks.
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