Millions of UK households that had hoped the cost-of-living crisis was finally easing face the prospect of a renewed squeeze, as the Bank of England held rates at 3.75% on Thursday and warned that the Iran war could push energy prices higher and trigger rate increases before the year is out. The monetary policy committee voted unanimously to hold, but its hawkish signals and energy bill warnings suggested that the financial pressure on UK families may be far from over. Officials described the US-Israel conflict against Iran as a significant new threat to the UK’s economic stability.
The cost-of-living crisis that has defined the economic experience of UK households over the past several years appeared to be easing. Inflation had been falling, wages had been rising in real terms, and the Bank had appeared to be on a path toward lower interest rates. The Iran war has disrupted that tentative recovery by introducing a new external shock through global energy markets.
Governor Andrew Bailey acknowledged the difficult position this creates for UK families. He said the effects of the war were already being felt through higher petrol prices and warned that household energy bills could follow if supply disruptions continue. The Bank’s response was to hold and observe, preserving its options while assessing the scale and duration of the shock.
Financial markets moved to price in rate hikes in June and later in the year, pushing UK gilt yields higher and sending the FTSE 100 lower. Five-year fixed mortgage rates have already climbed to their highest levels since early 2025. The combination of potentially higher energy bills and rising mortgage costs represents the core of the renewed cost-of-living threat.
For the government, the prospect of an extended cost-of-living crisis creates a serious political challenge. Labour came to power in part by promising economic improvement for ordinary people, and a renewed squeeze on household finances would directly challenge that narrative. Chancellor Reeves is reportedly examining support options, but the fiscal and political constraints on intervention are considerable.
