UK interest rate cuts this year now look increasingly unlikely after financial markets sharply repriced expectations for Bank of England policy in the wake of the escalating conflict involving Iran, which has pushed oil prices higher and driven up UK government borrowing costs.
Traders are now effectively pricing in the Bank holding Bank Rate at 3.75% for the remainder of 2026, a marked shift from expectations only days ago when markets had been leaning towards a cut at the Monetary Policy Committee’s next scheduled meeting on 19 March.
According to market pricing cited by the Guardian, the probability of a March rate cut has fallen heavily, from about an 80% chance before the recent escalation to around a 99% expectation that rates will be left unchanged. Some market measures are also beginning to reflect the possibility of a rate rise next summer if higher energy costs feed through to inflation and wage expectations.
The repricing comes as investors react to a surge in global oil prices, with Brent crude rising above $100 a barrel and trading sharply higher at points in recent sessions amid fears that disruption in the Gulf could constrain supply. In intraday moves on Monday, Brent briefly surged above $115 before easing back, according to market data. Oil’s rise has been closely watched by central banks because it can lift household bills and business costs quickly, pushing up inflation even as higher prices also weigh on growth.
The UK bond market has also moved abruptly. Gilt yields, which influence the government’s cost of borrowing and form an important benchmark for many mortgage rates, have risen as investors demand more compensation for the risk that inflation stays higher for longer. Higher yields can tighten financial conditions even before the Bank of England makes any decision, by pushing up the cost of borrowing across the economy.
Mortgage lenders have already begun adjusting pricing in response to changes in swap rates and gilt yields, after several months in which markets had been moving in the opposite direction on the assumption that the Bank would start to ease policy gradually. Moneyfacts-style averages reported by MoneyWeek last week put the average two-year fixed mortgage rate at 4.84% and the average five-year fixed rate at 4.96%, levels that could face renewed upward pressure if market rates remain elevated.
The Bank of England held Bank Rate at 3.75% in February in a closely split decision, with the MPC voting 5–4 to keep policy unchanged, according to the Bank’s published minutes. That narrow vote underlined how finely balanced the policy debate has become, with inflation pressures easing compared with their peak but concerns persisting about the pace at which price rises will return to target.
The latest oil-driven shift adds to that complexity. A sustained increase in energy prices risks lifting headline inflation and reigniting concerns about second-round effects, where higher fuel and utility bills translate into broader price rises through transport costs, supply chains and wage bargaining. At the same time, geopolitical uncertainty and higher input costs can dampen activity, leaving policymakers weighing inflation risks against the danger of a slowdown.
Analysts quoted by the Guardian said markets were now assuming policymakers would “wait to see how the conflict develops” rather than move quickly towards rate cuts. In a separate earlier report, the paper said bond markets had been pricing a “worst-case scenario of a prolonged war… and an energy-price inflation shock”, a set of conditions that typically makes central banks more cautious about loosening policy.
The sharp move in expectations matters because it alters the financial backdrop facing households and businesses. When markets anticipate lower interest rates, lenders can offer cheaper fixed-rate deals and companies can borrow at more favourable terms. When those expectations reverse, the cost of new borrowing can rise quickly, even if the central bank has not changed rates.
For the Treasury, higher gilt yields increase debt interest costs over time and can complicate funding plans, particularly if the rise proves persistent. Investors will be watching whether the recent moves extend to longer-dated gilts, which play a key role in pricing for pensions and other long-term liabilities.
The next focal point is the Bank of England’s 19 March decision, where investors will scrutinise not only the vote split but also the tone of the Bank’s guidance on how it is weighing energy-driven inflation risks against any signs of weakening demand. Markets will also be watching upcoming inflation and wage data for evidence of how quickly higher oil prices are filtering through to the UK economy.
For now, the key change is the speed of the reversal. What had been shaping up as a plausible start to a gradual easing cycle this spring has, in the space of days, been overtaken by renewed inflation fears linked to the oil price shock, leaving investors braced for rates to stay higher for longer and, in a more extreme scenario, for borrowing costs to rise again next year.