.jpeg?width=1200&height=800&crop=1200:800 "UK interest rate cut hopes dashed as Iran war sends energy prices soaring – UK Times")
Economists have dramatically revised their forecasts for interest rates, now deeming a cut by the Bank of England next week “senseless” as escalating conflict in the Middle East drives up energy prices.
The shift means the Monetary Policy Committee (MPC) is widely expected to hold borrowing costs steady at 3.75% at its upcoming announcement on Thursday, a stark reversal from previous expectations of a reduction.
This sudden change in outlook is directly linked to the recent surge in oil and gas prices, which threatens to reignite UK inflation.
While the Bank had anticipated Consumer Prices Index (CPI) inflation falling close to 2% by April, experts now warn that price rises could accelerate in the latter half of the year if higher wholesale energy costs translate into steeper household electricity and fuel bills.
The Office for Budget Responsibility (OBR), the government’s official forecaster, cautioned earlier this week that persistent energy price spikes could add a full percentage point to UK inflation this year.
Edward Allenby, senior UK economist for Oxford Economics, commented on the situation: “The UK inflation outlook was starting to brighten, but the conflict in the Middle East has thrown a spanner in the works.
“Against this backdrop, it’s almost certain that the MPC will keep bank rate unchanged at 3.75% at the March meeting. If the shock proves short-lived and recent price rises fully reverse, we still think there’s a reasonable chance that the MPC will resume its cutting cycle either in April or June.
“However, if the surge in energy prices persists or goes higher, the MPC will be set for an extended pause.”
Thomas Pugh, chief economist for RSM UK, echoed this sentiment, suggesting that a rate cut is now off the table for this month and potentially April too.
He stated: “Reflecting the scale of volatility we’re all coming to terms with, it was only two weeks ago that a March rate cut looked like a dead cert. A cut clearly makes no sense now.
“Given uncertainty about the outlook for energy prices, inflation and the economy, the most sensible thing for the Bank of England to do now is wait for more clarity. This rules out a rate cut next week and probably one in April too, unless there’s a rapid resolution to the crisis.”
The ripple effect of the conflict is already being felt in the UK mortgage market, with major lenders hiking rates in response to a sharp rise in swap rates, which underpin mortgage pricing.
Financial information website Moneyfacts reported that at least 530 homeowner mortgage deals have vanished from the market since Monday, representing approximately 7.5% of available products.
This turbulence, it noted, is some of the most significant since the aftermath of the September 2022 mini-budget.
