The Bank of England is poised to maintain its current interest rates in the upcoming meeting on Thursday, adopting a cautious stance amid the unfolding Middle East conflict. Initially, a rate cut was anticipated this month, but the onset of hostilities in Iran has prompted a reassessment due to the potential economic implications of a sudden energy shock.

Recent spikes in energy costs are stoking fears of rising inflation, prompting the Monetary Policy Committee to deliberate on the potential duration of these impacts. They intend to observe whether the surge in energy prices will be a fleeting issue or a more prolonged challenge.

In an alarming development on Wednesday afternoon, oil prices rocketed close to $110 per barrel. This escalation followed Iran’s threat of a ‘full-scale economic war’ as a response to an attack on one of its energy facilities, causing further market turbulence.

As of now, financial markets have factored in almost a certainty that the Bank will hold the interest rate steady at 3.75 percent. There is also minimal expectation of a rate reduction in the near future.

Prior to the conflict, which erupted just over two weeks ago, there was an 85 percent likelihood anticipated for a rate cut to 3.5 percent. However, the current geopolitical climate has significantly altered those projections.

Before the conflict started just over two weeks ago, markets were pricing in an 85 per cent chance of a cut in rates to 3.5 per cent. 

In a note to clients, JP Morgan said it expects the BoE to leave rates on hold for the rest of the year, having previously expected two cuts in April and June. 

Trumpflation: The Iran war is already hitting households who need to remortgage 

Traders will look keenly at the Bank of England’s inflation forecasts published tomorrow, but the general consensus is it is expected to remain high for a few months.

Rob Wood, chief UK economist at Pantheon Macroeconomics says petrol prices have already started rising ‘and will take a couple of months to fall back even if oil prices drop sharply today’.

Analysts at investment bank ING anticipate a peak for headline inflation in late summer at around 3.5 per cent, while Oxford Economics has warned it could exceed 5 per cent if the war is prolonged, far beyond the target 2 per cent.

It will cause another squeeze on incomes, but households are already feeling the pain of ‘Trumpflation’ as fuel and mortgage costs have rocketed since the start of the war.

It will now cost £800 more to take out a new mortgage, according to recent figures from Moneyfacts, with the average two-year fixed rate mortgage jumping from 4.83 per cent at the start of the March to 5.3 per cent this morning.

Adam French, of Moneyfacts, said: ‘The financial effects of ‘Trumpflation’ are already hitting home as the conflict in Iran is driving inflation concerns.

‘That has forced markets to rethink the outlook for rate cuts, pushing borrowing costs higher and prompting lenders to pull and reprice deals at speed. 

‘For borrowers, it means the window for ultra-competitive sub-4 per cent rates has been slammed shut, at least for now.’

While mortgage lenders are raising interest rates, it is not a sign the Bank of England will raise the base rate on Thursday, but rather that the path to lower rates is less clear.

It marks a swift shift in sentiment, with money markets starting to price in potential rate increases later in the year.

That has, in part, been because it was central banks’ reaction to Russia’s invasion of Ukraine in 2022, which pushed inflation in higher.

But the circumstances are different this time, says Peel Hunt’s chief economist Kallum Pickering.

‘On the supply side, the current problem stems directly from the military conflict and ensuing disruptions, not the permanent and self-imposed sanctions that major economies have placed on Russia since 2022.

‘Chances are, Gulf energy production and shipping will resume once the fighting ends, and perhaps even before that if the Strait of Hormuz is partially reopened and other infrastructure comes back online.’

Pantheon Macroeconomics says that the price of crude oil would have to reach above $125 a barrel to force the MPC to raise rates. 

Currently, oil is nearing $105 a barrel with the price up 51 per cent over the past month. 

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