The Bank of England is widely anticipated to maintain its base interest rate at 3.75% during its upcoming vote on Thursday, even as the ongoing conflict in Iran drives up living costs. Economists suggest that the Monetary Policy Committee (MPC) will look past a recent spike in inflation, which climbed from 3% to 3.3% last month, largely due to soaring fuel prices linked to the Middle East crisis.
Expected Decision and Market Reactions
Prior to the outbreak of the Iran war in late February, market expectations leaned heavily toward a series of rate cuts throughout 2024. However, the energy shock and early signs of accelerating inflation have derailed those plans. While some MPC members may vote for a hike to 4% or advocate for cuts, the consensus is a hold at 3.75%. This decision would provide relief to mortgage borrowers, who are directly or indirectly affected by rate changes.
Thomas Pugh, chief economist at RSM UK, commented: "Signs that the economy is holding up, while inflation is accelerating, makes it more likely that the Bank of England will raise interest rates later this year."
Impact of the Iran Conflict
The MPC's last vote occurred just 19 days after the US-Israel war with Iran erupted. Sandra Horsfield, an economist at Investec, noted: "Whereas military strikes were still underway during the MPC’s last policy discussion, the upcoming meeting looks to be held while the US’s indefinite ceasefire is in place. However, the repercussions of the conflict are still keenly felt and uncertainty about how the situation could evolve also remains high, which will be key points the MPC will have to consider. We expect the MPC to keep the Bank rate on hold at 3.75% this time, as it did at the March meeting."
Foregone Conclusion or Surprise?
Research firm Pantheon Macroeconomics describes the decision as "a foregone conclusion," predicting all nine MPC members will vote to hold rates. However, there is a chance that one or two members might back a cut. Financial markets still assign a 10% probability of a rate hike this month.
Implications for Savers
Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, suggested that a hold could benefit savers. "A 3.75% hold could be positive news for savers, as the ‘higher for longer’ stance could elevate savings rates and reward them with better returns on their cash," she said. "Now could be an ideal time to review old accounts, loyalty often comes at a significant cost. When shopping around for their next deal, savers need to decide whether they want the flexibility of easy access or the certainty of fixed rates."
