In a windowless conference room in London last week, Bank of England Governor Andrew Bailey delivered a stark warning: The US-Israeli attacks on Iran have dramatically reshaped the calculus for central banks worldwide, forcing them into an impossible policy choice.
Before the outbreak of hostilities in the Middle East, the Bank of England was widely expected to lower interest rates over the course of this year as the economy showed signs of softening. But the shock to energy supplies has now put the central bank in a vise.
- Higher fuel and power costs drive inflation, typically requiring rate hikes
- Slowing growth calls for interest rate cuts to spur spending and investment
- UK's dependence on imported gas amplifies the economic damage
- Conflict duration will determine severity of the damage
"There's really difficult judgments to be made," Bailey told the BBC. "We're not going to rush to judgments on those things, because there are a lot of uncertainties around this, not just how it's going to play out, but also how it's going to pass through into the UK economy."
The International Monetary Fund warned Wednesday that central banks should avoid hastily raising borrowing costs in response to the Middle East conflict — advice that Bailey says the Bank of England is heeding. But the IMF's managing director, Kristalina Georgieva, raised fresh concerns about potential disruptions to the global supply of crucial industrial inputs like sulphur, urea, helium and naphtha.
Before the Iran crisis, UK economic indicators were pointing toward a possible interest rate cut. The job market was cooling, and companies were struggling to pass price increases on to consumers, suggesting inflation was less likely to become entrenched. Those positive signals now compete with the stark reality of energy-driven inflationary pressures.
Bailey emphasized the UK's particular vulnerability due to its heavy reliance on imported gas for electricity generation. While he noted "a certain amount of resilience in the system," that resilience could erode if the conflict drags on. "The faster there is a resolution to this situation — I particularly mean in terms of the supply of energy coming out of the Gulf — the easier and better the outcome will be."
The conflict has exposed deep divisions among Western allies over economic priorities. UK Chancellor Rachel Reeves delivered pointed criticism of the war on Wednesday, highlighting its impact on prices and growth. In contrast, US Treasury Secretary Scott Bessent argued that "a small bit of economic pain" was justified for the sake of long-term global security, even raising the speculative claim that Iran might threaten the UK with nuclear missiles.
A UK government spokesperson quickly disputed Bessent's characterization, stating: "There is no assessment Iran is trying to target Europe with missiles."
The IMF's latest analysis suggests the UK faces the steepest economic hit among advanced economies if the conflict persists. Yet Bailey offered one reassuring note: "I do not have concerns about the banking system." He defended post-financial crisis regulations, arguing that "success is when nothing happens and it is resilient."
For homeowners already squeezed by higher borrowing costs, Bailey's message was sobering but straightforward: the best outcome requires "credible policies that deliver sensibly over time" — both from the central bank and the government's fiscal decisions.
The Bank of England's next rate decision comes April 30th, with markets now expecting rates to hold steady or even rise.
