The Bank of England’s monetary policy committee has warned that British households and businesses may be unusually sensitive to fresh price shocks after years of above-target inflation, as it voted unanimously to hold rates at 3.75% and flagged the risk that the Iran war could trigger further increases. External member Megan Greene highlighted the heightened vulnerability of the British public to inflation after five years of prices running above the 2% target. The warning came as the Bank assessed the energy market consequences of the US-Israel conflict against Iran.
Greene’s comment reflects a broader concern within the committee about the cumulative impact of successive economic shocks on the UK public. Since the pandemic, through the energy crisis and into the current period, inflation has repeatedly surprised on the upside and eroded household purchasing power. The war in the Middle East threatens to add another layer to that burden by driving energy prices higher at a time when many had hoped for relief.
Governor Andrew Bailey acknowledged the changed environment but sought to strike a balanced tone. He said the Bank was monitoring the situation carefully and stood ready to act but was not committing to any particular path. He warned that rising petrol prices were an early indicator of the war’s economic impact and said the knock-on effects could spread to household energy bills.
Financial markets showed little patience for the governor’s balanced approach, moving to price in rate hikes in June and later in the year. UK gilt yields rose, the pound gained against the dollar, and the FTSE 100 fell in the aftermath of the announcement. Mortgage rates for five-year fixed deals climbed to their highest since early 2025.
The broader implication of Greene’s warning is that the Bank may be more sensitive to inflation shocks than in previous cycles, given the erosion of public tolerance for above-target prices. This could push the committee toward action sooner rather than later if the energy shock proves persistent. The next few months of inflation data will be critical in testing that hypothesis.