The Bank of England is widely expected to hold interest rates steady at 3.75% when its Monetary Policy Committee (MPC) meets this Thursday, a shift in expectations prompted by escalating tensions in the Middle East and the ongoing conflict between the United States and Iran.
Just weeks after economists anticipated a potential rate cut following a dip in inflation to 3% in January – the lowest rate since March of last year – the outbreak of war has injected renewed inflationary pressure into the UK economy, primarily through surging energy prices. Oil prices closed above $100 a barrel on Thursday, reaching a high not seen since 2022, and finished the week above $103.
Sanjay Raja, chief UK economist at Deutsche Bank, predicted the MPC will adopt a “dovish ‘wait-and-see’ approach,” anticipating a less divided vote than in February. “This shift, we consider, will be driven by the change in perception of downside risks to inflation and a change in risk management considerations due to the energy price shock,” Raja stated.
Edward Allenby, senior UK economist for Oxford Economics, concurred, noting the conflict had “thrown a spanner in the works.” He added, “Against this backdrop, it’s almost certain that the MPC will keep bank rate unchanged at 3.75 per cent at the March meeting.” Allenby suggested a resumption of the cutting cycle remains possible in April or June, but is contingent on a swift resolution to the conflict and a reversal of recent price increases.
The potential for a prolonged conflict is now a key factor influencing economic forecasts. Analysis from Oxford Economics indicates the UK could fall into recession should the price of oil reach $140 a barrel and remain at that level until at least May.
President Donald Trump has further complicated the situation, stating he is unwilling to negotiate a deal with Iran, declaring, “Iran wants to make a deal, and I don’t seek to make it because the terms aren’t good enough yet,” and insisting any agreement must be “particularly solid.” Tehran has threatened to disrupt oil shipments through the Strait of Hormuz, a critical waterway for global energy supplies, with officials threatening to block “one litre of oil” from leaving the region.
Philip Shaw, chief economist at Investec, acknowledged the shifting landscape, stating that while his baseline forecast still anticipates rate easing in April and July, this is dependent on a swift end to the war and a return to normal energy production and distribution. He cautioned, however, that the risk of a rate hike later in the year, while not currently a primary concern, is increasing.
Ashley Webb, UK economist at Capital Economics, believes the Bank of England will respond to the inflationary pressures by maintaining rates at 3.75%, but argues that market expectations for higher interest rates have risen too sharply. Deutsche Bank forecasts two rate cuts later this year, but stresses this is contingent on evidence of falling core inflation and a resolution to the conflict in Iran.
