16 April 2026: Bank of England interest rates update as experts issue ‘can’t rule out’ Iran warning

Chancellor of the Exchequer Rachel Reeves acted as one would expect from a wounded animal by striking out at the Trump administration, which she feels went into the war in Iran without clear plans about what its goals were.

Hemmed in by meagre growth and the prospect of rising inflation, and with yet another downgrade from the IMF ringing in her ears, Reeves told reporters in Washington, where she is attending the IMF’s Spring Conference, that she believes that Trump was mistaken by attacking Iran, and has not made the world a safer place.

She has previously said the war was "folly" and added that "this is not our war, but it is pushing up costs for UK families and businesses." Reeves risked Mr Trump's fury with her latest remarks at a CNBC event on the fringes of the International Monetary Fund summit.

Speaking yesterday, she said, "Diplomatic negotiations were happening before this. So if the aim is now to get diplomatic negotiations, well, they were already happening before the conflict started." She added: "We've never been clear about what our goals of this conflict are, which is why the impacts on our economy, but also here in the US economy and around the world, and particularly for our allies in the Gulf, like Saudi Arabia, Qatar and the UAE, are so immense”.

The Prime Minister has been careful to defend the UK’s position in support of the UK’s national interest while avoiding being overly critical of the U.S. and Israel. However, Reeves has now, rightly or wrongly, opened up an entirely new “can of worms”.

Trump, who has not yet commented on Reeves' interview, but has already said that “ it is not too late to change the trade deal that he agreed with the UK last year, in response to the UK’s actions or lack thereof.

A senior finance expert has issued a verdict on the likely direction of UK interest rates amid concerns that the Bank of England may raise them due to Iran.

Peel Hunt's chief economist, Kallum Pickering, has said the MPC may be forced to take "drastic action" if the conflict drags on.

Yet he said his current expectation is that the Bank will carry out two interest rate cuts towards the end of this year, assuming a resolution is reached on trade routes across the Middle East.

Pickering described market pricing indicating a single rate hike as "odd", even as there was "increasing optimism" that a peace deal would be struck to reopen the Strait of Hormuz, where disruption to trade has heightened the threat of fuel shortages across the globe.

Meanwhile, the UK’s energy strategy has been described as unsustainable by manufacturing companies, which are seeing exponential increases in the cost of gas and electricity.

It was a quieter day in financial markets yesterday as traders and investors took an opportunity to try to fathom out what will happen next in the Middle East. There were unconfirmed reports that Trump had said the war was over and that talks would resume “in the next few days”.

Sterling fell to a low of 1.3543 and closed at 1.3561.

President Donald Trump yesterday repeated his threat to fire Federal Reserve Chair Powell if Powell does not step down from the Fed, renewing his attacks on a Fed Chief he has long accused of keeping interest rates too high. It remains to be seen whether he has the authority to take such action, a question that has been raised several times since Trump took office early last year.

Trump also refused to distance himself from the Justice Department’s criminal probe into the Fed’s $2.5 billion office renovation, which prosecutors have used to ratchet up pressure on the Fed even as the department’s legal case has faced legal and political headwinds.

Trump declined to direct the Justice Department to stand down from the investigation, which a Federal Judge last month found to be part of a broader White House pressure campaign against the Fed.

“Whether it’s incompetence, corruption or both, I think we have to find out,” Trump said, referring to the renovation inquiry. “I have to find out.”

Powell’s likely replacement as Fed Chair, Kevin Warsh, will be the wealthiest person ever to lead the Central Bank, as and when the Senate ratifies his nomination.

Warsh has submitted financial disclosures indicating he holds assets worth well over $100m.

The documents are required for his nomination to advance through the Senate, beginning with a yet-to-be-scheduled hearing.

While it is difficult to estimate net worth from US government ethics forms because assets are valued in broad and sometimes open-ended categories, Warsh’s includes two investments worth more than $50m each in the Juggernaut Fund LP and $10.2m in consulting fees from the investment office of Stanley Druckenmiller, the Wall Street giant.

The document filed with the US Office of Government Ethics is complex. For example, the Juggernaut Fund investments come with the caveat that the underlying assets “are not disclosed due to pre-existing confidentiality agreements”, and Warsh promises, “I will divest these assets if confirmed.”

The domestic economy has been largely ignored while the U.S. fights another war outside its own borders.

While Regional Fed Presidents discuss employment and inflation in broad terms, the economy is still slowing on the ground.

US homebuilders’ confidence fell to a seven-month low in April as the war in Iran pushed up mortgage rates and materials costs at the start of the spring selling season.

An index of market conditions from the National Association of Home Builders (NAHB) and Wells Fargo Bank fell 4 points to 34, according to data released yesterday. A reading below 50 indicates that more builders view conditions as poor than good. Measures of current and future sales both deteriorated.

The war in the Middle East is compounding a slew of challenges already facing the construction industry in recent years, including elevated mortgage rates, labour constraints and higher material prices. These developments come as the housing sector enters its busiest sales season of the year.

“With oil prices higher in the US, 62% of builders reported that suppliers have increased building material costs due to higher fuel prices, including gas and diesel,” the NAHB said in a statement. “With near-term economic risks elevated, 70% of builders reported challenges pricing homes given uncertainty about material costs.”

Mortgage rates have risen amid expectations that the war will prompt policymakers to keep interest rates elevated for longer. Many builders have relied on incentives to attract buyers, but the report indicated that some are starting to pull back amid rising costs. The index of sales expectations for the next six months declined by seven points to 42, the lowest level since June. The gauge of present sales and an index of prospective buyer traffic also decreased.

Separate data released this week showed that sales of previously owned US homes fell last month to the lowest level in almost a year, while a government report due later this month will offer insights into new construction.

The dollar indeed continued its slide yesterday, falling for the ninth consecutive trading session. It fell to a low of 98.01 and closed at 98.08.

European Central Bank chief economist Philip Lane has warned that interest rates may yet rise if euro-area inflation proves more persistent than policymakers currently expect, keeping the door open to further tightening even after the ECB held borrowing costs steady in March.

The Governing Council member, due to relinquish his post next year, said that “if the impact of inflation lasts for a longer period, the ECB will consider raising interest rates,” underlining that the fight against above-target price growth is not over.

His comments echo recent guidance from ECB President Christine Lagarde, who told the Financial Times that “if we expect inflation to deviate significantly and persistently from target, the response must be appropriately forceful or persistent,” signalling that rate hikes remain on the table if price pressures re-accelerate.

In its March policy decision, the ECB left its three key interest rates unchanged and reiterated that it is “determined to ensure that inflation stabilises at the 2% target in the medium term,” while acknowledging that the conflict in the Middle East has created upside risks for inflation via higher energy costs.

The Central Bank’s latest projections see headline inflation averaging 2.6% in 2026 and hovering around 2% in 2027 and 2028. Officials, including Lane, have flagged that wage dynamics and firms’ price-setting plans will be closely monitored at “every meeting” to assess whether those forecasts remain credible.

Lagarde has also stressed that “self-reinforcing mechanisms” could take hold if inflation expectations drift away from the target, warning that the risk of de-anchoring would “become acute” without a sufficiently firm response. This stance has kept markets wary of declaring the hiking cycle definitively over.

Traders in money markets currently price in two to three ECB rate increases by year-end, which would lift the main policy rate to roughly 2.50% to 2.75%, with the timing seen as highly sensitive to incoming inflation data and developments in energy markets.

The question remains whether, if the Governing Council believes that inflation will average 2.6% this year, that will be sufficient to warrant a rate hike, or whether its members will see another warning as sufficient until its next meeting in June, when the situation can be reassessed.

Germany must assume that the energy price shock caused by the war in Iran will persist, leaving the economy extremely fragile, Finance Minister Lars Klingbeil said earlier this week, ahead of travelling to the International Monetary Fund meeting in Washington.

The IMF has cut Germany's growth forecasts for this year and next, projecting growth rates of 0.8% in 2026 and 1.2% in 2027, down 0.3 percentage points from its previous forecasts for both years.

Klingbeil said he will discuss with Finance Ministers and international organisations which measures are best suited to stabilising the economy and markets and to providing targeted support to people and businesses that have been hit particularly hard.

"This crisis once again shows that we must become more independent, more crisis-proof and more resilient," he said. It is unclear whether he meant that Germany or the Eurozone should exert its independence.

He added that he will use the trip to Washington to present the German Government's reform agenda and to promote investment in Europe's largest economy.

Development Minister Reem Alabali Radovan, who will accompany Klingbeil on his visit to Washington, called for an end to the war.

"The international community must not hesitate now: The world needs peace, stability and an end to the violence," she said. "Every day counts."

In contrast to the dollar index, the Euro has posted 10 consecutive higher closes. Yesterday, it rose to a high of 1.1808 and closed at 1.1798. Technical levels have come and gone with little effect during the war in Iran. Once markets settle down, traders will have their work cut out to assimilate just how important such support and resistance points are.

Have a great day!