Rate-setter suggests current borrowing costs are restrictive enough to deal with inflation
A member of the Bank of England's Monetary Policy Committee (MPC) has said the central bank may be able to manage inflationary pressures stemming from the Middle East conflict without increasing its base rate — a view that runs against the direction of market expectations, which have shifted sharply since the outbreak of hostilities.
With the base rate still at a level restrictive enough to curb economic activity, MPC member Alan Taylor (pictured right) argued that holding borrowing costs where they are could be enough to contain inflationary second-round effects. "An extended hold would probably be enough restrictiveness to deal with the situation," he said.
Taylor has consistently favoured a lower rate than the majority of his MPC colleagues, and estimates the neutral rate — the level at which monetary policy neither stimulates nor restrains the economy — to be approximately 3%.
Between August 2024 and December 2025, the Bank of England cut interest rates six times — broadly once a quarter, each time by 0.25 percentage points — bringing the base rate down from a recent high of 5.25% to 3.75%. The December 2025 reduction was decided by a narrow majority of 5–4, with four members voting to hold at 4%. The MPC then voted unanimously to keep the rate unchanged at 3.75% at its March 2026 meeting. The rate was again held at 3.75% at the latest meeting.
The Middle East conflict has substantially altered the inflation outlook. US-Israeli airstrikes on Iran drove Brent crude up by as much as 13% at one point, to around $82 a barrel, on fears of supply disruption. That pushed up energy costs and made it harder for the Bank of England to bring inflation back to its 2% target, even though headline CPI had been expected to reach that level by April.
Oil prices have since risen from around $60 a barrel at the start of the year to roughly $100, following attacks on Iran that disrupted shipping through the Strait of Hormuz. The OECD has warned that Britain's heavy reliance on imported fuel and its sensitivity to energy price swings explain why the UK outlook has deteriorated more sharply than that of its European peers.
Oxford Economics estimates that the disruption to energy markets will add approximately 0.4 percentage points to UK inflation in 2026. Consumer price growth is now projected to average around 2.7% this year, compared with a pre-conflict forecast of 2.3%, keeping inflation above the Bank of England's 2% target for longer. Higher oil prices, a weaker pound, and a temporary jump in wholesale gas prices underpin the revised outlook.
Last week, BoE deputy governor Sarah Breeden said the central bank is in no rush to raise interest rates, as policymakers take stock of the economic consequences of the Middle East conflict.
That said, Taylor acknowledged that a more severe scenario, in which oil prices rise to $130 per barrel and remain there for several months, could produce stronger second-round inflationary effects that would necessitate a rate rise.
MPC member Catherine Mann took a more cautionary view, arguing that the Middle East conflict, alongside underlying economic conditions, means the market-implied path for the base interest rate has already increased since hostilities began, tightening financial conditions. She suggested firms possess more pricing power than current models assume, and that rising household inflation expectations could reinforce wage pressures through future bargaining rounds.
Market are now largely expecting no cuts for the rest of 2026, and are pricing in the possibility of Bank Rate rising back to 4% by June 2027. A Mortgage Introducer poll found that 53% of respondents expect no rate cuts from the Bank of England in 2026, while 33% expect only one.
Some forecasters have gone further, with predictions that the Bank of England could raise the base rate as high as 5.25% at some point this year, driven by the energy price shock and its effect on swap rates — the financial benchmarks lenders use to price fixed-rate mortgages.
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