The economic calendar for 2025 has been turned upside down by the Iran war, with the Bank of England voting unanimously to hold rates at 3.75% on Thursday and warning that anticipated rate cuts have been replaced by the possibility of rate hikes as global energy prices surge. The monetary policy committee described the US-Israel conflict against Iran as a significant new shock that had fundamentally altered the UK’s near-term economic outlook. Officials warned that inflation could rise above 3% and that borrowing costs might need to increase before the year is out.
The calendar inversion has been dramatic. At the start of the year, the expectation was for gradual rate reductions through 2025, providing a tailwind for the housing market, business investment, and consumer spending. The war has replaced that tailwind with a potential headwind, as rising energy prices threaten to push inflation higher and force the Bank to consider tightening rather than easing. The Bank now projects inflation rising toward 3.5% in March and remaining elevated throughout 2026.
Governor Andrew Bailey described the war as an unexpected development that had forced the Bank to revisit its assumptions. He warned that rising petrol prices were already evident at UK forecourts and said the knock-on effect on household energy bills could follow if supply disruption persists. The Bank would monitor the situation carefully and act if necessary, he said, while emphasising that no predetermined path had been set.
Financial markets moved to price in the calendar inversion immediately. UK gilt yields climbed, the FTSE 100 fell, and the pound strengthened against the dollar as traders adjusted their expectations for UK monetary policy. A June rate hike is now widely anticipated, with a second possible before December. Mortgage rates for five-year fixed deals have already moved to reflect the changed calendar.
For businesses and households that had built their 2025 financial plans on the expectation of falling rates, the calendar reversal creates real practical challenges. Investment projects, property purchases, and mortgage decisions made on the basis of anticipated rate cuts may need to be reassessed. The Bank’s next meeting will be a critical indicator of whether the calendar inversion continues or whether any de-escalation of the conflict allows a return to the original script.