The Bank of England is widely expected to keep interest rates at 3.75 per cent when policymakers meet next Thursday, March 19, as escalating tensions in the Middle East complicate the outlook for inflation.
Members of the central bank’s rate-setting committee will gather for the latest meeting of the Monetary Policy Committee (MPC) to determine whether borrowing costs should change.
Just two weeks ago, economists had widely anticipated a reduction in interest rates.
Some forecasters predicted two cuts during 2026 as inflation continued to fall toward the central bank’s two per cent target.
However, the outlook has shifted significantly following rising tensions in the Middle East that have disrupted global energy markets.
Sharp increases in oil and natural gas prices have forced analysts to reconsider their expectations for monetary policy.
Market pricing now suggests roughly even odds that borrowing costs could increase before the end of the year.
The shift represents a notable reversal from earlier expectations that policymakers would begin cutting interest rates in March before pausing until 2027.
Energy prices have risen sharply in recent weeks.
Economists say conflict-driven energy price surge has forced policymakers
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Oil and gas prices are now estimated to be roughly 50 per cent higher than the assumptions used in the central bank’s most recent economic forecasts.
Some economists now believe inflation could rise to between 3.5 and four per cent by December.
Such an outcome would represent a departure from the previously expected path toward the Bank’s two per cent inflation target.
Motorists could face higher fuel costs in the near future.
Thomas Pugh, chief economist at RSM UK, said petrol prices could rise from around £1.33 per litre to almost £1.60 in the coming weeks.
Household energy costs are also expected to remain elevated.
Bank of England interest rates over time
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Bank of England
Earlier expectations that bills might fall during the summer have largely disappeared following the surge in global energy prices.
Officials in Iran have warned that oil prices could climb beyond 200 dollars per barrel if the conflict disrupts global shipping routes or energy production.
The situation has created a difficult decision for policymakers.
Michael Saunders, a former member of the MPC who now works at Oxford Economics, said central banks would normally look beyond temporary energy price shocks.
Interest rate changes typically take between 12 and 18 months to influence the wider economy.
However, Mr Saunders said recent experience suggests inflation expectations may not remain stable during prolonged price shocks.
Mr Saunders said: “Recent experience has shown that inflation expectations are not as well anchored as central banks had hoped.”
He warned that sustained increases in energy prices could lead to persistent inflation unless policymakers respond.
The Bank remains mindful of criticism that it reacted too slowly when energy prices surged after Russia’s invasion of Ukraine.
Internal divisions within the committee have already emerged.
During February’s meeting, the decision to hold rates was narrowly passed by five votes to four.
Four policymakers supported cutting borrowing costs at that time.
Dani Stoilova, an economist at BNP Paribas, expects the next vote to show stronger support for maintaining the current rate.
Ms Stoilova predicts a seven to two vote in favour of leaving interest rates unchanged.
Despite the inflation concerns, some economists say the case for cutting rates has not entirely disappeared.
The UK labour market has shown signs of weakening in recent months.
Unemployment has risen to 5.2 per cent, representing a five-year high compared with 3.8 per cent in 2022.
Economic growth was also slowing before the conflict intensified.
Matt Swannell, chief economic adviser at EY ITEM Club, said policymakers had only recently begun focusing more closely on labour market conditions.
He said: “Just last month the focus of the MPC had shifted from inflation towards labour market weakness, with a March cut firmly on the table.”
Raising borrowing costs in an environment of weak growth and rising unemployment could increase the risk of stagflation.
Economists expect policymakers to wait before taking further action.
Mr Pugh said: “Given uncertainty about the outlook for energy prices, inflation and the economy, the most sensible thing for the BoE to do now is wait for more clarity.”