Labour’s growth agenda faces a serious threat following the Bank of England’s decision to hold rates at 3.75% and signal the possibility of rate hikes ahead, with the Iran war’s energy price impact threatening to undermine the economic conditions the government had counted on. The monetary policy committee voted unanimously to hold, but the hawkish tone of its communication represented a material challenge to the falling borrowing cost environment that underpinned the government’s economic strategy. Analysts were blunt about the implications.
The growth agenda developed by Chancellor Rachel Reeves and the Labour government had been premised in significant part on the expectation of declining borrowing costs. Falling interest rates would stimulate business investment, support household spending, and ease the burden on public finances. The Iran war has disrupted that expectation by driving global energy prices higher and making rate hikes more likely than cuts in the near term.
Kathleen Brooks, a research director at XTB, described rising mortgage rates as another blow to the government’s growth strategy, which had hinged on lower interest rates. Her comments reflected a broader analytical view that the changed monetary outlook represented a significant headwind for the UK economy in 2025. Five-year fixed mortgage rates had already moved to their highest levels since early 2025.
Governor Andrew Bailey steered clear of political commentary, focusing on the Bank’s inflation mandate and the energy price risks created by the Iran conflict. He warned that rising petrol prices were an early indicator of the shock and said household energy bills could follow. The Bank would act to keep inflation on target regardless of external pressures, he said.
For the government, the combination of a rising rate outlook, potentially higher energy bills, and a slowing labour market represents a genuinely difficult economic environment. Opposition parties have been quick to exploit the situation, framing it as a failure of economic management. Chancellor Reeves faces difficult choices in the weeks ahead as the Bank signals that the era of cheap money may not return as quickly as hoped.