The Bank of England is widely expected to keep interest rates on hold at 3.75% when its Monetary Policy Committee (MPC) meets next Thursday, 19 March, as the escalating Middle East conflict throws the UK’s inflation outlook into disarray and forces policymakers to tear up their plans for further cuts.
As recently as two weeks ago, a March rate cut looked almost certain, with some expecting two cuts for 2026, with inflation cooling and on track to hit the Bank’s 2% target by early spring.
That calculus has changed dramatically, with rates futures putting around a 50/50 chance there could even be a rate hike this year.
Surging oil and natural gas prices, both running around 50% above the assumptions underpinning the MPC forecasts last month, are now expected to push inflation back up towards 3.5% to 4% by the end of the year, according to some economists.
RSM UK chief economist Thomas Pugh said petrol prices could jump from around £1.33 a litre to close to £1.60 in the coming weeks, Pugh estimates, while a hoped-for drop in household energy bills over the summer now looks firmly off the table.
Economist Dani Stoilova at BNP Paribas expects the MPC to vote 7-2 to hold, and said the Bank’s previous plan to cut in March and then pause until 2027 was now under review.
The dilemma facing the MPC is acute, said Michael Saunders, a former MPC rate setter now at Oxford Economics.
In normal circumstances, central banks look through energy price shocks, since interest rate changes take 12 to 18 months to feed through to the economy and can do little to immediately tackle rising prices.
But Saunders argued that this approach no longer holds.
“Recent experience has shown that inflation expectations are not as well anchored as central banks had hoped,” he said, adding that energy price shocks could create persistent inflation “unless checked by monetary policy.”
The MPC is also acutely aware of its reputation after being widely criticised for moving too slowly when energy prices surged following Russia’s invasion of Ukraine in 2022.
Yet the case for cutting has not entirely disappeared, with unemployment having swelled to a five-year high of 5.2%, compared with 3.8% in 2022, and economic growth already subdued before the conflict began.
Matt Swannell, EY ITEM Club’s chief economic adviser, noted that just last month the MPC’s concerns were shifting away from inflation and towards the labour market – a March cut had been “firmly on the table.”
Hiking rates into a weakening economy risks the dreaded spectre of stagflation, so analysts and economists agreed that the most likely outcome is that the MPC holds its nerve and waits.
“Given uncertainty about the outlook for energy prices, inflation and the economy, the most sensible thing for the BoE to do now is wait for more clarity,” said Pugh, adding that a cut in April also looked unlikely unless the crisis resolved quickly.
Close attention will be paid to what policymakers say about the path ahead, though most analysts expect the committee to offer little, preferring to keep its options open until the fog of the Middle East conflict begins to clear.