Hopes of near-term mortgage relief have been dashed after the Bank of England held rates at 3.75% on Thursday and signalled that rate hikes, rather than cuts, may be on the horizon due to the energy price impact of the Iran war. The monetary policy committee voted unanimously to hold, but the hawkish tone of its communications sent mortgage rates in the wrong direction for millions of UK homeowners. Five-year fixed rates have already climbed to their highest levels since early 2025, and the prospect of further increases loomed large over Thursday’s announcement.
The reversal of fortunes can be traced directly to the US-Israel military operation against Iran, which has driven global energy prices higher in recent weeks. Before the conflict, the Bank had been expected to reduce rates, providing relief to borrowers and giving the housing market a boost. The war has changed that calculation, introducing a significant upside risk to inflation that has shifted the policy debate from cuts to potential hikes.
Governor Andrew Bailey acknowledged the impact on ordinary people but said the Bank’s primary responsibility was to keep inflation anchored. He warned that the energy price shock could persist if global supply lines remained disrupted, adding to the financial pressure on households. His message to borrowers was essentially one of patience — the Bank was holding steady and assessing the situation.
Financial markets reflected the changed outlook sharply. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders priced in rate hikes before year end. Analysts at XTB described rising mortgage rates as another blow to the government’s growth strategy, which had relied on the assumption of falling borrowing costs.
The Liberal Democrats were among the first political voices to respond, blaming trade-related inflation policies and the political figures associated with them for the squeeze on household finances. Chancellor Reeves faces a challenging period, balancing fiscal constraints with the need to provide some form of relief for families facing higher mortgage payments and potentially steeper energy bills simultaneously.
