Iran Conflict Halts Bank of England Rate Cut Expectations

The sudden escalation of hostilities in Iran has triggered a sharp reversal in monetary policy expectations across major financial centers. Prior to the conflict, financial markets priced in a 70% probability of a Bank of England rate cut in March 2026, with a further 85% likelihood in April. Those forecasts have now been revised downward, with the probability of a March cut falling to just 25%, according to recent pricing on UK interest rate futures. The shock has driven a spike in global risk aversion, as reflected in the CBOE Volatility Index (VIX), which rose to 28.6 on March 8—the highest level since late 2023. This increase in market uncertainty has prompted investors to seek safe-haven assets, pushing German 10-year bond yields (BUND=F) down to 2.04% from 2.21% in the prior week. Meanwhile, the UK 10-year gilt yield climbed to 4.39%, reflecting increased demand for UK debt as a hedge against regional instability. The conflict has also disrupted energy markets, with Brent crude futures (CL=F) surging 7.3% to $89.40 per barrel, driven by fears of supply chain interruptions in the Strait of Hormuz. This spike in oil prices could fuel inflationary pressures, further constraining the Bank of England’s ability to ease monetary policy. The pound (GBP=USD) weakened to $1.2480, down 1.5% from its pre-conflict level, as investors reassess the UK’s economic outlook amid external shocks. Financial institutions across Europe and North America are revising risk models and liquidity forecasts. The Bank of England, while maintaining its stance of data dependence, has not ruled out delaying a rate cut until at least June if inflation remains sticky and geopolitical risks persist. Market participants now view the central bank’s next move as contingent on both macroeconomic indicators and the trajectory of regional tensions.