Real estate shares dropped significantly Thursday after the Bank of England warned that inflation could rise sharply this year and financial markets priced in a rise in interest rates.

The FTSE 350 Real Estate Index fell 3% Thursday following comments from the Bank of England that suggested rate hikes are a distinct possibility.

Financial markets had been expecting a rate cut either this month or next month, but the Bank unanimously decided to hold rates at its monthly Monetary Policy Committee meeting.

Following the decision, Bank of England Governor Andrew Bailey said the Bank “stands ready to act” if there is an inflation shock as a result of rising oil prices caused by the conflict in Iran.

He later cautioned against interpreting that rate rises are a given this year, saying it is impossible to say at this stage whether any rise in inflation will prove persistent. The impact of the war could also cause an economic slowdown that would mitigate rate rises, he said.

But bond rates spiked nevertheless, and the market is now pricing in two or three rate increases this year.

Rising interest rates are bad for real estate because they increase the cost of debt and make the asset class less attractive compared to buying bonds.

Segro shares fell 3.7%, Landsec shares dropped 4.4%, British Land shares dropped 3.6%, and Grainger and Hammerson shares fell 3.5% each.

Some economists painted a slightly rosier picture for rates.

“Despite the Bank’s hawkish tone, a rate cut remains possible later this year once the energy shock impact begins to ease and inflation falls as expected,” KPMG Chief Economist Yael Selfin said.