The Bank of England gathers this week to make a choice that the world has already half-made for it. A war launched by the United States and Israel against Iran has pushed oil toward $100 a barrel and tightened the grip of imported gas on Britain's household budgets, at a moment when the economy was already sluggish and prices were stubbornly high. Where a rate cut once seemed certain, the likely outcome is a pause, with the Bank choosing to wait rather than gamble, as central bankers always must when the future is clouded by distant guns and rising fuel costs.
Bank of England Set to Hold Rates as Middle East War Revives Inflation Risk
A rate-cut path "narrower and narrower by the day"
Mark
Why is a rate hold such a big story if everyone expects it?
Mimi
Because of what it replaces. Before February 28 a cut to 3.5% looked almost certain. The war flipped that, and now the interesting part is the wording, not the vote.
Mark
What wording, specifically?
Mimi
For two meetings the MPC said that on current evidence rates were likely to fall further. Barclays expects that line to be dropped in favour of language saying the pace of easing depends on the inflation outlook.
Luke
That's a forecast of a statement, though, not the statement. Barclays is guessing, and so is the 7-2 vote. That figure is what economists mostly expect, not something the Bank has said.
Mark
And the inflation numbers? 3-4% sounds specific.
Mimi
It's conditional. Analysts say that's where inflation could be by end-2026 if oil and gas stay at current levels, versus roughly 2% before.
Luke
Right, so it's an if. If oil falls under $80, as Stoilova's one-cut scenario requires, that picture changes. Nobody here knows how long the war lasts.
Mark
Why does the Bank fear inflation expectations so much?
Mimi
They're still elevated. If the public expects higher prices, it's harder for the Bank to say it can look through a temporary energy spike. And 2022, when inflation passed 11%, still hangs over it.
Luke
Worth noting the report says most economists think the Bank is less likely than the ECB to hike. That's a lean, not a certainty, and investors last week were pricing some chance of rises.
Mimi
Which is why playing for time, as Paul Dales put it, is the likely posture.
Il Polso
- A rate cut that markets had counted on has been swept off the table by a war-driven surge in energy prices.
- Oil near $100 a barrel and Britain's dependence on imported gas are pushing inflation toward 3-4% if prices hold.
- Policymakers fear rising energy costs will seep into public expectations, echoing the painful inflation of 2022 they were slow to answer.
- Economists expect the Bank to hold at 3.75% with a 7-2 vote, while the wording of its guidance is poised to change.
The Bank of England gathers this week to make a choice that the world has already half-made for it. A war launched by the United States and Israel against Iran has pushed oil toward $100 a barrel and tightened the grip of imported gas on Britain's household budgets, at a moment when the economy was already sluggish and prices were stubbornly high. Where a rate cut once seemed certain, the likely outcome is a pause, with the Bank choosing to wait rather than gamble, as central bankers always must when the future is clouded by distant guns and rising fuel costs.
The Bank of England meets this week, and its decision is largely settled before the votes are cast. Economists polled by Reuters expect the Monetary Policy Committee to hold Bank Rate at 3.75% on Thursday, with seven members in favour and two likely to dissent. Only weeks ago, a cut to 3.5% looked close to certain.
Everything changed when the U.S.-Israeli war on Iran began on February 28. Oil has climbed to around $100 a barrel, and the crisis has reminded Britain how heavily it depends on imported gas. The economy was already weak and inflation was already stubborn, so the shock arrived at the worst possible time. If energy prices hold, inflation could reach 3-4% by the end of 2026, well above the Bank's 2% target.
The deeper worry is that higher energy costs spread into public expectations about future prices, which are still elevated. The Bank has not forgotten 2022, when it was criticised for moving too slowly as inflation topped 11%. For now, Governor Andrew Bailey and his colleagues can only wait and see how long the war and the energy spike last.
The path after this meeting is unclear. Some economists see one more cut only if oil falls below $80, while others still expect two within six months. The Bank's statement may matter as much as the vote: its line that rates would likely fall further on the basis of current evidence may be dropped. Most economists think the Bank will play for time rather than follow the European Central Bank toward hikes.
The Bank of England meets this week with a decision that has already, in effect, been made. Economists polled by Reuters mostly expect the Monetary Policy Committee to vote 7-2 on Thursday to leave Bank Rate at 3.75%. Before the war began on February 28, a cut to 3.5% was seen as a near certainty.
What changed is the U.S.-Israeli war on Iran, and with it the price of energy. Oil is now around $100 a barrel. The crisis in the Gulf has once again exposed how heavily Britain relies on imported natural gas, and it has arrived at a difficult moment: the economy was already facing weak growth and stubborn inflation pressures before the fighting started.
Analysts say that if oil and gas prices stay where they are, the direct effect could push British inflation to about 3-4% by the end of 2026. Earlier forecasts had it near 2%, the Bank's target. The larger worry for policymakers is indirect. Higher energy costs could feed into the public's inflation expectations, which are still elevated, and that would make it harder for the Bank to argue that it can look through a short-term price spike.
The Bank is also carrying a memory. It and other central banks were criticised for moving too slowly when Russia's full-scale invasion of Ukraine drove British inflation above 11% in 2022. Governor Andrew Bailey and his colleagues can do little now except wait to see how long the war lasts and how persistent the jump in oil and gas prices proves to be.
Nobody agrees on where rates go next. A Reuters poll of economists last week showed no consensus on timing for the next cut. Dani Stoilova, UK and Europe economist at BNP Paribas Markets 360, thinks only one more cut is possible, and only if oil falls from about $100 to under $80. "There might still be a pathway for them to deliver a final rate cut to 3.5% over the next few months, but it's looking narrower and narrower by the day," she said. Other economists still expect two cuts within six months.
The wording of the Bank's statement may matter as much as the vote. At its previous two meetings, the MPC said that "on the basis of the current evidence" rates were likely to fall further. Barclays analysts expect that line to go, with the emphasis shifting to a different part of the guidance: that the extent and timing of further easing will depend on how the inflation outlook evolves. Investors will study remarks from individual MPC members for signs of how far their views have moved, though Edward Allenby, senior economist at Oxford Economics, expects those remarks to be vague. The committee, he said, will be very conscious of the risk of major policy errors and the credibility damage if it were forced into a reversal.
Markets have moved further than the economists. Last week investors priced in the possibility that borrowing costs could rise rather than fall. Most economists, though, think the Bank is less likely than the European Central Bank to pivot to hikes. Bank Rate at 3.75% is already relatively high, the economy is struggling to grow, unemployment is rising, and finance minister Rachel Reeves has raised the tax burden to its highest since just after World War Two.
Paul Dales, chief UK economist at Capital Economics, summed up the likely approach: "I think the Bank is going to play for time which, when things are so uncertain, makes sense." The things to watch on Thursday are whether the "current evidence" phrase disappears, and what the two expected dissenters, and everyone else, say about how far the war has changed their thinking.
Citazioni salienti
I think the Bank is going to play for time which, when things are so uncertain, makes sense.— Paul Dales, chief UK economist, Capital Economics
There might still be a pathway for them to deliver a final rate cut to 3.5% over the next few months, but it's looking narrower and narrower by the day.— Dani Stoilova, BNP Paribas Markets 360
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War & Conflict