Bank of England (BoE) policymakers indicated they were close to cutting interest rates before the outbreak of conflict involving Iran forced a change in direction, with the Monetary Policy Committee voting unanimously to hold amid rising uncertainty over inflation.
Deputy governor Sarah Breeden said that, without the escalation, she “would have expected to vote for a cut again in March”, but instead backed holding rates, warning the conflict will “have a significant, though at this point highly uncertain, impact on inflation”.
Fellow deputy governor Dave Ramsden also said he had been preparing to support a cut before the war broke out, adding that the “damaging economic shock resulting from the Middle East conflict has caused me to revisit my policy position”.
Sharp increase in global energy and commodity prices
The BoE pointed to a sharp increase in global energy and commodity prices as a key factor behind the decision. Disruption in the Strait of Hormuz — through which around one-fifth of global oil and liquefied natural gas supply flows — has pushed up both the level and volatility of energy costs after attacks on vessels attempting transit.
It warned that higher input costs could lead to so-called “second-round effects”, with businesses passing on price increases and upward pressure building on wages.
Catherine Mann, an external member of the MPC, said the balance of risks had shifted. She warned the inflationary impact of the conflict could prove more persistent, adding that the outlook had moved away from further cuts “towards considering a longer hold, or even a hike at some point to lean against inflation persistence”.
Governor Andrew Bailey, however, pushed back on expectations of imminent rate rises, saying markets were “getting ahead” of themselves. “I would caution against reaching any strong conclusions about raising interest rates,” he said, adding that “the right place to be is on hold” while the BoE monitors developments.
A clear distinction with the 2022 energy shock
He also sought to draw a distinction with the 2022 energy shock following Russia’s invasion of Ukraine, suggesting inflation would rise but not return to the double-digit levels seen at that time.
Despite the decision to hold the base rate, mortgage pricing has already shifted. Lenders have increased fixed-rate deals in recent weeks, reflecting changing expectations in financial markets.
Mortgage rates are typically priced on anticipated future movements in the base rate rather than the current level, with funding costs also influencing lender decisions. Earlier expectations of multiple rate cuts this year have weakened, with some analysts now factoring in the possibility of increases instead.
According to BBC reporting, other central banks have taken a similar approach. The US Federal Reserve held rates this week, with chair Jerome Powell saying it was “too soon” to assess the impact of the Iran conflict. The European Central Bank, Bank of Canada and Bank of Japan have also left rates unchanged, citing increased volatility linked to the situation in the Middle East.
The BoE said it would take a “wait and see” approach ahead of its next meeting, noting that even if the conflict eases, energy supply chains may take time to normalise and could keep prices elevated.
