The ongoing conflict in the Middle East has dashed hopes for an impending interest rate cut in the UK, as rising energy prices threaten to push inflation higher. Economists now anticipate that the Bank of England will maintain its current borrowing rate of 3.75% during its upcoming Monetary Policy Committee (MPC) meeting on Thursday, reversing earlier expectations of a reduction.
Energy Prices Surge Amid Conflict
The surge in oil and gas prices, linked to the escalating situation in the Middle East, has prompted a reassessment of the UK’s economic outlook. Previously, the Bank of England anticipated a drop in the Consumer Prices Index (CPI) inflation to around 2% by April. However, experts now warn that if wholesale energy costs continue to rise, households might face increased electricity and fuel bills, potentially reigniting inflation later this year.
The Office for Budget Responsibility (OBR), the government’s official fiscal forecaster, has alerted that sustained energy price hikes could add as much as a full percentage point to UK inflation in 2026. This unexpected shift underscores the fragility of the current economic climate.
Expert Insights on Interest Rate Predictions
Edward Allenby, Senior UK Economist at Oxford Economics, remarked on the dire situation. “The UK inflation outlook was beginning to improve, but the Middle East conflict has disrupted that progress,” he stated. Allenby expressed certainty that the MPC will refrain from altering the bank rate at the March meeting, emphasising the need for caution. He noted, “If the recent price increases are short-lived, there might be a possibility for the MPC to resume cuts in either April or June. However, if energy prices remain elevated, we could see a prolonged pause.”
Similarly, Thomas Pugh, Chief Economist at RSM UK, echoed these sentiments, asserting that a rate cut is now unlikely for March and potentially April as well. “Just two weeks ago, a March cut seemed almost certain. Now, given the volatility we’re witnessing, it would be imprudent to proceed with a reduction,” he explained. Pugh recommended that the Bank of England adopt a wait-and-see approach until there is greater clarity regarding energy prices and inflation trends.
Mortgage Market Impact
The ramifications of the conflict are already being felt in the UK mortgage market. Major lenders have responded to the volatility by increasing rates, following a sharp rise in swap rates that influence mortgage pricing. Financial data provider Moneyfacts has reported that over 530 mortgage deals for homeowners have disappeared from the market since the onset of the crisis, accounting for nearly 7.5% of available options. This disruption is among the most significant since the aftermath of the controversial mini-budget in September 2022.
Why it Matters
The implications of this situation extend far beyond the immediate crisis in the Middle East. With interest rate cuts now off the table, consumers and businesses alike may face higher borrowing costs, impacting everything from mortgages to personal loans. As inflation pressures mount due to soaring energy prices, households could find themselves squeezed financially, further complicating the economic recovery. The decisions made by the Bank of England in the coming weeks will be critical in shaping the financial landscape for millions across the UK.
