The Bank of England is expected to keep the Bank Rate unchanged at 3.75% in a 7-2 vote split. The central bank is likely to adopt a “wait and see” approach amid the US-Iran war and the energy price shock, but maintain an easing bias.

The extent and timing for further rate cuts will likely hinge on the duration of the US-Iran war as the BoE should acknowledge that policy will need to remain restrictive to avoid second-round inflation risks.

The UK labour market report today showed some welcome easing in wage growth with steady unemployment rate and much higher than expected jobs gain. The February PMIs were also positive with the S&P Global noting that business activity continued to pick up across the UK service economy, with growth holding close to the five-month high seen at the start of 2026. The latest UK inflation report saw the Headline CPI Y/Y easing to 3.0% and the Core CPI Y/Y to 3.1% in January (we will get the February report next week).

The economic backdrop before the US-Iran war started wasn’t bad at all, we just had the usual labour market slack that kept putting downward pressure on inflation and justifying BoE rate cuts. In fact, just before the war started, the market was pricing more than 80% chance of a rate cut today given last meeting’s dovish hold.

Now, traders are pricing in 36 bps of tightening by year-end, with a 50% chance of a rate hike in June. This is just due to the US-Iran war and the energy price shock. That’s why the BoE will feel more comfortable holding rates steady given the geopolitical uncertainty, but if the conflict and the disruption in the Strait of Hormuz was to last much longer and raise inflation expectations, the central bank might eventually need a rate hike.