BoE Interest Rate Prep

On Thursday the 19th of March, at 08:00 ET, the Bank of England reveals their decision from it’s latest monetary policy meeting, and releases the rate statement.
Here are some views on what to expect.

General Expectations
Expectation from Analysts and Market Participants forecast the BoE to hold rates steady at 3.75%, unchanged from the prior rate. With the high and low ranges supporting this.

Investment Bank Commentary
Goldman Sachs
Higher energy prices resulting from the war in Iran have increased upside risks to the UK inflation outlook. We therefore expect the MPC to hold Bank Rate unchanged at next week’s meeting with a 7-2 vote. We expect the Committee to refrain from offering a strong steer on the near-term policy outlook, noting that in the current context of elevated uncertainty it will decide the appropriate degree of restriction at each meeting. But we think that the guidance will indicate that some further policy easing remains likely if energy prices fall back. We expect that Bailey will convey a similar message in his individual paragraph.

The economic outlook and the path for Bank Rate depend importantly on the evolution of energy prices. The MPC’s Taylor rules suggest that additional rate cuts will likely be delayed incrementally as the inflation outlook deteriorates. Our simulations, however, do not point to rate hikes, even in our very adverse energy price scenario that leads to notably higher core inflation given that monetary policy remains restrictive and the labour market is weakening. In our baseline forecast, we see the next rate cut in July, followed by November and February to a terminal rate of 3%. We would expect the BoE to delay rate cuts further with additional upward pressure on energy prices but see a high hurdle for hikes. Our scenarios are therefore more dovish than current market pricing.

ING
Investors have slashed expectations for a March rate cut from the Bank of England; markets are pricing it with just a 20% probability, down from 80% pre-conflict. We are pushing back our call for the next cut to April, though we wouldn’t rule out a move this month. Remember, those who have voted for rate cuts at recent meetings have done so because the labour market is getting weaker. That hasn’t changed. Still, the Bank of England has shown itself to be particularly sensitive to supply-driven spikes in headline inflation, more so than the Federal Reserve or the European Central Bank. Last summer’s hawkish response to higher food prices made that abundantly clear. Chief Economist Huw Pill has often cited 3.5-4% as a level for headline CPI which, if reached, is statistically much more likely to morph into a longer-lasting bout of price pressure.

That threshold could easily be tested if natural gas prices stay at or above 120p/therm – equivalent to 50 EUR/MWh on the Dutch TTF benchmark – into Q2 and if oil prices persistently flirt with 85-90 USD/bbl. Headline inflation would peak at 3.5% in late-summer. And that’s before considering the secondary impact on food and services inflation. A more extreme scenario where oil prices go to 110 USD/bbl and European gas prices rise persistently above 65 EUR/MWh could push headline inflation temporarily close to 5%. We estimate every 10% rise in oil prices adds 0.1ppt to headline inflation. Every 10% rise in gas prices is worth 0.15ppt.

But this will take some time to show through fully. Household energy prices are capped by the regulator and only 40% of that cap is directly affected by gas prices. The next update isn’t until July and that’ll be based on average wholesale prices from mid-February to mid-May, focusing on energy contracts for delivery next autumn/winter. That means the more short-lived the energy price spike, the less of an impact it will have on households this summer.Rising energy prices inevitably revive memories of the 2022 shock. But there’s an important difference: the jobs market is much, much weaker now. In early 2022, more than half of firms told the Bank it was “much harder” than usual to recruit. Today that figure is just 10%. Vacancies are substantially lower and unemployment higher, meaning workers have less bargaining power to drive up wage growth and protect their disposable incomes.

Something similar is true of corporate pricing power. Food retailers wouldn’t struggle to pass on higher costs, but consumer services probably will. They were a key source of inflation amid the 2022 spike; energy is a key input cost for hospitality and others. Those same industries have been shedding workers through 2025. Further cost pressure from energy bills is more likely to trigger even lower headcounts than higher prices, limiting the impact on services inflation relative to 2022.

Morningstar
Energy prices continue to soar as a result of the Iran war, upending assumptions about falling inflation and interest rates. UK government bond yields have spiked as markets scale back the likelihood of interest rate cuts. Fund managers say the Bank of England is better prepared for an inflation shock than in 2022. UK stock and bond markets have shown a dramatic response to the outbreak of war in the Middle East this week, reflecting changed assumptions about the future path of UK interest rates.

Investors have sold out of short-dated UK government bonds, sending yields soaring, as markets fear an inflationary shock may cause the Bank of England to row back from further interest rate cuts. Yields on two-year UK gilts have risen just over 40 basis points this week, the biggest one-week increase since August 2024. And shares in UK banks and housebuilders have also fallen this week as investors reprice the likelihood of “higher for longer” mortgage rates. Prior to the conflict’s outbreak, swaps markets had priced in a near-certain cut to UK interest rates when the Bank of England’s Monetary Policy Committee next meets on Mar. 19. That likelihood has now dropped to less than 20%, according to futures markets, which also point to no further rate changes this year. This follows four interest rate cuts in 2025 and two in 2024.

“Clearly, there are expectations of a more cautious central bank facing a potential reacceleration of inflation over the coming quarters—albeit a temporary one, since energy price shocks are that classic textbook transitory, supply-side shock,” says Morningstar economist Grant Slade. “There’s certainly an open question as to how high energy prices go in the near term, and therefore how significant a supply-side shock this turns out to be. That will determine how much more cautious the Bank of England is in normalizing interest rates in coming quarters.”