Bank of England holds rates as Iran war and oil supply shocks heighten stagflation risks

The Bank of England has held interest rates steady while outlining three distinct scenarios for the UK economy and inflation, driven by the escalating uncertainties of the Iran war now in its third month. According to Asharq Al-Awsat, the central bank abandoned its usual single forecast in the April 2026 Monetary Policy Report, opting instead for this range of possibilities to account for the war's unpredictable fallout, including potential monetary tightening ahead.

At the heart of these scenarios lies the ongoing crisis in the Strait of Hormuz, which has effectively closed due to Iranian actions, insurance withdrawals, and risk perceptions, halting about 20% of global petroleum flows. This "soft closure"—more commercial than physical—has compounded disruptions from Houthi attacks on the Suez Canal, compromising roughly one-third of seaborne crude trade and spiking oil prices toward $100 to $200 per barrel if prolonged beyond 30 days. Reports from Thomson Reuters and the Stimson Center highlight how major shipping lines like Maersk have suspended transits, triggering shortages in fertilizers, metals, refined products like diesel and jet fuel, and even LNG headed to Asian markets.

Stagflation risks have intensified as financial markets grapple with these mounting costs, with the Strait's prolonged shutdown exacerbating energy supply shocks unseen in modern times. Asharq Al-Awsat notes that markets can no longer ignore the economic toll, while modeling from sources like the Dallas Fed warns that sustained high oil prices—above $100 per barrel—could push US inflation 1.3 percentage points higher by late 2025, with similar pressures likely rippling to the UK. The Bank of England's scenarios likely span from quick de-escalation easing prices to prolonged conflict embedding war risks into energy, shipping, and insurance costs indefinitely.

This matters profoundly for households and businesses across the UK and beyond, as higher energy bills, disrupted supply chains, and elevated inflation threaten growth in import-dependent economies. Germany has already halved its growth forecasts, the IMF has trimmed global outlooks, and the European Central Bank's severe scenario envisions Brent crude peaking at $145 per barrel, slashing regional expansion. UK consumers face rising fuel and utility costs, while industries from aviation to manufacturing absorb cascading delays, even those without direct Gulf ties.

What happens next hinges on de-escalation efforts, such as US and Israeli naval protection restoring shipping confidence or diplomatic pressure from allies like China and Russia to reopen the Strait. Analysts cited by Thomson Reuters view a "prolonged conflict with partial reopening" as most probable, holding oil around $80 per barrel amid sporadic attacks, though any extension past key thresholds risks overwhelming recession probabilities. The Bank of England's flexible forecasting signals readiness to tighten policy if inflation surges, underscoring the war's role as a direct transmission belt from Middle East tensions to global macroeconomic stability.