The Bank of England is poised to keep interest rates unchanged in light of the recent conflict in the Middle East, which has triggered a sharp rise in energy prices. Economists now deem a rate cut in the near future “senseless,” marking a significant shift from earlier expectations. This decision comes as the Monetary Policy Committee (MPC) prepares for its upcoming meeting on Thursday, where rates are expected to remain at 3.75%.
Escalating Conflict and Rising Costs
The ongoing tensions in the Middle East are not just a geopolitical concern; they are impacting the economy on a domestic level. With oil and gas prices on the rise, there are fears that inflation in the UK could be reignited. Previously, the Bank of England had anticipated a decline in the Consumer Prices Index (CPI) inflation to near 2% by April. However, experts are now revising these predictions, suggesting that increased wholesale energy costs could lead to higher household bills later in the year.
The Office for Budget Responsibility (OBR), the UK government’s official economic forecaster, recently warned that sustained spikes in energy prices might add an entire percentage point to inflation this year.
Economists Weigh In
Edward Allenby, a senior economist at Oxford Economics, expressed that the outlook for UK inflation had improved but has now been jeopardised by the conflict abroad. “The UK inflation outlook was starting to brighten,” he noted, “but the conflict in the Middle East has thrown a spanner in the works.” He anticipates that the MPC will hold the bank rate steady at 3.75% during their March meeting. However, he also mentioned that if the energy price surge is temporary, the MPC might resume cuts as early as April or June.
Chief economist Thomas Pugh from RSM UK echoed these sentiments, asserting that a rate cut is highly unlikely not just for this month, but potentially for April as well. “Reflecting the scale of volatility we’re all coming to terms with,” he remarked, “it was only two weeks ago that a March rate cut looked like a dead cert. A cut clearly makes no sense now.”
Mortgage Market Turmoil
The ramifications of the crisis are already being felt in the UK mortgage market. Major lenders have responded to rising swap rates, which influence mortgage pricing, by increasing their rates. According to financial information provider Moneyfacts, over 530 mortgage deals for homeowners have disappeared since the beginning of the week, which accounts for around 7.5% of the available mortgage products. This upheaval is reminiscent of the turbulence experienced following the September 2022 mini-budget.
Why it Matters
The current situation highlights the interconnectedness of global events and domestic economics. As energy prices rise due to international conflict, the potential for inflation increases, impacting consumer spending and economic stability in the UK. With interest rates remaining unchanged, borrowing costs will stay steady for now, but the uncertainty surrounding energy prices and inflation could influence economic decisions for months to come. This scenario serves as a reminder of how external factors can profoundly affect local economies, making it imperative for consumers and policymakers to stay informed as the situation evolves.
