UK interest rate cut off the table amid Middle East conflict, economists say

Most are now expecting the Bank of England’s Monetary Policy Committee (MPC) to keep borrowing costs unchanged at 3.75% at its next announcement on Thursday, having previously guided towards a cut.

The pivot reflects the changing outlook for energy costs on the back of soaring oil and gas prices in recent weeks, and the potential for this to weigh on UK inflation.

The Bank had previously been expecting Consumer Prices Index (CPI) inflation to fall close to 2% by April, but experts say price rises could accelerate towards the second half of the year should higher wholesale gas and oil prices feed through into steeper household electricity and fuel costs.

The Office for Budget Responsibility (OBR), the Government’s official forecaster, warned earlier this week that one percentage point could be added to UK inflation this year, should the current energy price spike persist.

Edward Allenby, senior UK economist for Oxford Economics, said: “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, agreed that the recent events will have taken a rate cut off the table this month, and potentially also for April.

He said: “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.”

A wave of Britain’s biggest lenders have been hiking mortgage rates on the back of the conflict, prompted by a sharp rise in swap rates, which are used to price mortgages.

Financial information website Moneyfacts said at least 530 homeowner mortgage deals have vanished from the market since Monday, representing about 7.5% of deals.

It said recent days had been some of the most turbulent in the UK mortgage market since the aftermath of the September 2022 mini-budget.