**
The Bank of England’s anticipated interest rate cut has become increasingly unlikely due to the ongoing turmoil in the Middle East, which has contributed to soaring energy prices. Economists have revised their forecasts, predicting that the Monetary Policy Committee (MPC) will maintain the current borrowing rate at 3.75% during its upcoming meeting on Thursday, a significant shift from prior expectations of a potential reduction.
Energy Prices Surge Amidst Geopolitical Instability
The recent spike in oil and gas prices, driven by the Middle East conflict, poses a serious challenge to the UK’s inflation outlook. Previously, the Bank of England had projected a decline in the Consumer Prices Index (CPI) inflation to near 2% by April. However, experts now caution that rising wholesale energy costs could lead to increased household bills, jeopardising this forecast.
The Office for Budget Responsibility (OBR), the government’s fiscal watchdog, has warned that sustained energy price hikes could add an entire percentage point to UK inflation this year. Edward Allenby, senior UK economist at Oxford Economics, remarked, “The UK inflation outlook was starting to brighten, but the conflict in the Middle East has thrown a spanner in the works.” He further indicated that the MPC is likely to keep the bank rate unchanged in March, with future cuts dependent on the duration and impact of the current energy price surge.
Economic Analysts Weigh In
Thomas Pugh, chief economist at RSM UK, echoed Allenby’s analysis, asserting that the prospect of a rate cut has been largely dismissed for March and likely for April as well. 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.” Pugh emphasised that the Bank of England’s most prudent course of action would be to await clearer signals regarding energy prices and economic conditions, effectively ruling out immediate rate cuts unless the geopolitical situation stabilises rapidly.
Impact on the Mortgage Market
The ramifications of the rising energy prices are being felt across the UK mortgage landscape. Major lenders have responded to the volatility in swap rates—the benchmarks for mortgage pricing—by increasing their rates. Data from financial information provider Moneyfacts indicates that over 530 mortgage deals have been withdrawn from the market since Monday, accounting for approximately 7.5% of available options. This level of disruption mirrors some of the most significant turbulence seen since the aftermath of the September 2022 mini-budget.
Why it Matters
The implications of this shifting economic landscape are profound. With inflationary pressures mounting due to geopolitical instability, households may face increased financial strain as energy costs rise. Moreover, the stagnation in interest rates could hinder economic recovery efforts, particularly in the housing market, where affordability is already a pressing concern. As the situation develops, the Bank of England will need to navigate these challenges carefully, balancing the need for economic stability against the backdrop of global uncertainties.
