Odds on the Bank of Scotland cutting interest rates this month have plummeted as borrowing costs surge in response to the US and Israel’s military strike against Israel.
This comes as a blow to Chancellor Rachel Reeves ahead of her Spring Statement this afternoon, as well as millions of households across the UK who are likely to face a cost of living hit.
Investors are pricing in a prolonged conflict in the Middle East following the Islamic Republic’s decision to close the Strait of Hormuz, the shipping route that transports 20 per cent of the world’s oil exports.
This morning, the UK’s 10-year gilt surged to 4.5 per cent and has continued in an uphill trajectory, which is likely to factor into the central bank’s decision-making regarding the base rate.
Borrowing costs SURGE as Bank of England interest rate cut plans ‘disrupted’ ahead of Spring Statement
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Over the past year, the Bank’s Monetary Policy Committee (MPC) has slashed the base rate to 3.75 per cent as inflationary concerns have eased.
However, with the price of energy beginning to spike in response to the growing conflict, the consumer price index (CPI) rate of inflation is expected to surge in response.
Based on the financial markets, there is currently only a 33 per cent chance of a base rate cut from 3.75 per cent to 3.5 per cent.
As it stands, the Bank of England’s Monetary Policy Committee (MPC) is expected to announce its decision regarding the base rate on March 19.
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Last week, the odds of an interest rate cut from the Bank stood at 80 per cent, this fell to 50 per cent when markets opened on Monday morning.
As well as a potential hike to their energy bills, Britons are now at risk of being saddled with higher borrowing costs as loan and mortgage payment rates may increase.
Rohan Khanna, the head of European Rates Research at Barclays, said: “Investors are basically going back to the 2022 energy-shock template. That is very fresh in our minds. We saw how large and persistent the inflation shock was.”
Jemma Slingo, a pensions and investment expert at Fidelity International, added: “Stubbornly high oil and gas prices could impact economies around the world. Specifically, they could be inflationary and disrupt plans to cut interest rates.
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“The MPC has held several nail-biting votes in recent months, and conflict could complicate things further.”
Jinesh Vohra, CEO of mortgage app Sprive, is encouraging homeowners to consider using any spare cash they may have to overpay their mortgage and potentially save thousands in interest.
He shared: “With the Spring Statement later today, dozens of lenders have already cut rates, including Barclays, Nationwide, NatWest, Santander and today, Gen H and while the Bank of England has been clear reductions will be gradual and measured, it still points to borrowing costs continuing to ease, which could leave many homeowners with extra cash each month.
“Around 17 per cent of mortgage holders are on variable rates, meaning their payments fall automatically when rates are cut. And as lenders continue to price in future reductions, many borrowers coming off fixed deals could also benefit from lower rates.”