City analysts have warned that the Bank of England’s decision to hold rates at 3.75% and signal potential rate hikes driven by the Iran war could inflict serious damage on the government’s growth strategy, which was built on the expectation of falling borrowing costs. The monetary policy committee voted unanimously to hold on Thursday, but the hawkish tone of its communications prompted warnings about the impact on investment, consumer spending, and mortgage affordability. The UK’s economic growth outlook has deteriorated meaningfully since the war broke out.
The growth strategy that Labour developed after coming to power had several key pillars, among them an assumption that the Bank of England would continue reducing interest rates over the course of 2025. Lower rates would stimulate business investment, support consumer spending, and ease the mortgage burden on millions of households. The Iran war has disrupted that assumption by introducing an energy-driven inflation shock that makes rate cuts less likely and rate hikes possible.
Kathleen Brooks, research director at trading platform XTB, was among the analysts most direct about the consequences. She described rising mortgage rates as another blow to the government’s strategy, noting that the entire growth framework had hinged on lower interest rates. Her assessment was widely shared in City circles, where the changed monetary outlook has prompted a downgrade in economic growth expectations.
Financial markets reflected the changed growth outlook. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders adjusted their expectations for UK monetary policy. Analysts noted that the sectors most affected by higher rates — housing, consumer spending, and business investment — would face particular challenges if the Bank proceeds with tightening.
For the government, the damage warning from City analysts is politically significant. Growth has been a central promise of Labour’s economic pitch, and a more restrictive monetary environment directly threatens the government’s ability to deliver on that promise. The chancellor faces the challenge of adapting the growth strategy to a world where the monetary tailwind has turned into a potential headwind.