Policymakers at the Bank of England are leaning toward a wait-and-see approach and are widely expected to keep the benchmark interest rate unchanged this Thursday, influenced by heightened U.S.-Iran tensions. Market participants and economists broadly anticipate the Monetary Policy Committee will maintain the current rate of 3.75%, with traders pricing in only a 10% chance of an increase. The rate decision will be announced at 19:00 Beijing time, followed by a press conference half an hour later by Governor Andrew Bailey.
The central bank faces a delicate balancing act: on one hand, U.S.-Iran conflict risks driving prolonged volatility and increases in energy prices; on the other, the UK’s domestic economy remains sluggish, requiring policy adjustments to address dual risks. Although a weaker labor market could help prevent a damaging price-wage spiral—similar to the one that troubled the Bank after the Russia-Ukraine conflict in 2022—Chief Economist Huw Pill, concerned about secondary inflationary effects, is expected to vote for a rate hike.
The Monetary Policy Committee is also likely to retain language signaling it remains “ready to take action” to counter persistent inflationary threats. At the March meeting, the committee voted unanimously to hold rates steady, but forecasters now expect at least one dissenting vote in favor of tightening among the nine members. A survey of 32 economists showed about two-thirds expect a split vote, with the most common prediction being an 8-1 outcome.
Pill is seen as the most likely to call for immediate action, having recently warned against a “wait-and-see” strategy. Deputy Governor Clare Lombardelli and external members Megan Greene and Catherine Mann—all previously hawkish—may also lean toward a hike due to geopolitical developments.
The Bank aims to avoid a repeat of the market turbulence seen after the March meeting, when UK gilt yields and rate expectations surged sharply. The volatility prompted Bailey to intervene, stressing that officials were in no rush to respond to mounting price pressures. However, with U.S.-Iran tensions near the Strait of Hormuz threatening energy supplies, money markets on Wednesday priced in three rate hikes this year, with the first potentially coming as early as June.
Oil prices recently climbed above $119 a barrel, while benchmark natural gas futures also rose significantly. The Committee is expected to largely reiterate March’s forward guidance, keeping the door open to hikes if needed. Individual views in the meeting minutes may offer clearer signals, and the Bank could use multiple inflation scenarios in its Monetary Policy Report to indicate how close it is to raising rates.
Elizabeth Martins, UK economist at HSBC, noted, “Given that the MPC’s March communication surprised markets, this time the Committee may soften its hawkish tone slightly.” The Bank’s February forecasts projected modest growth and a return of inflation near the 2% target this spring, but updated projections are set to paint a very different picture.
The UK economy is highly sensitive to oil and gas price fluctuations. Despite encouraging GDP figures before the recent conflict, the new outlook is likely to highlight a significantly heightened risk of technical recession. Most economists expect growth forecasts for this year and next to be revised down, with projections also likely to show inflation remaining well above the 2% target through 2026.
Given high uncertainty over the duration of the Iran conflict, scenario analysis will be a central tool in the Bank’s policy communication. The central bank may model the impact of energy price shocks and secondary inflation effects under different assumptions, outlining a baseline scenario to signal how it could respond to geopolitical risks.
Analysts Dan Hanson and Matthew Bunny stated, “The Bank of England is likely to rely heavily on scenario analysis to gauge the duration and intensity of the energy price shock and the corresponding monetary policy response. Many policymakers worry that raising rates amid weak domestic demand could further weaken the economy.”
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