A potential end to the Iran war gives the Bank of England a clear path to hold interest rates on Thursday – just one week after the European Central Bank raised rates for the first time in nearly three years.
With the US and Iran agreeing on a framework deal to stop military operations and allow the reopening of the Strait of Hormuz, the hope is that ships will soon again begin to move through the key route with oil and other commodities.
The price of oil and the yield on UK government bonds both fell on Monday morning, in an effective sigh of relief from the money markets that further global economic pain might be spared. Brent Crude fell almost 5 per cent to $83, while the 10-year gilt yield is down more than one per cent to its lowest level since mid-April.
While that latter is a small boost to government borrowing costs, it’s also a signal – along with two-year gilts falling 1.5 per cent on Monday morning – that money markets are removing some of their expectations of an interest rate hike in 2026.
The Bank of England’s (BOE) Monetary Policy Committee (MPC) meet on Thursday 18 June and will be expected to hold at 3.75 per cent, as they battle the threats of rising inflation, a stuttering economy and a job market which is expected to see unemployment rise further later this year.
“We have already tightened policy considerably in response to the shock relative to what had been expected by markets. And that is already affecting the economy,” BoE governor Andrew Bailey said recently.
Back in February, the expectation was for one or two rate cuts this year, but the Iran war – causing a surge in oil prices, which sends energy costs up and contributes to rising inflation – saw the BoE have to change course. The base rate has been at 3.75 per cent since December 2025.
The Bank of England’s Monetary Policy Committee is set to meet on Thursday (Reuters)
Kathleen Brooks, research director at XTB, said: “It is worth noting that although inflation is a major concern right now, inflation trends suggest that the pass-through effect is weaker than originally assumed. Producer prices and headline inflation are rising sharply, yet this is not feeding into core inflation, which adjusts for the price of commodities, or higher wages.”
Of course, how long markets, inflation and even the BoE continue down this path depends on how sturdy that framework ends up being.
Mortgages and the property market
In terms of wider impact on British consumers, the falling bond markets and a hold on interest rates could see further reductions in swap rates (the market that property mortgage deals primarily take their pricing from).
Mortgage rates have been coming down recently already. The average two-year fixed residential mortgage is now at 5.61 per cent, per Moneyfacts, having been at 4.84 per cent on 28 February before the war started and reaching a high of 5.9 per cent by early April.
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