The Bank of England is expected to keep interest rates unchanged as policymakers adopt a cautious stance while assessing the impact of the Middle East conflict on the cost of living. However, experts indicate that a rate increase could still be on the horizon if the conflict continues to fuel inflationary pressures.
Monetary Policy Committee Decision
Most economists predict that the Bank's nine-member Monetary Policy Committee (MPC) will maintain the current rate of 3.75% at its upcoming decision, scheduled for announcement on Thursday at midday. Alongside the rate decision, the MPC will release its first full monetary policy report and updated economic forecasts since the conflict between US-Israeli and Iranian forces escalated in late February.
Inflationary Pressures from Conflict
Recent economic data has highlighted the conflict's role in driving inflation higher. The Office for National Statistics (ONS) reported that UK Consumer Prices Index (CPI) inflation rose to 3.3% in March, a three-month high, primarily due to accelerating fuel prices. Motor fuel prices surged by 8.7% month-on-month, marking the largest increase since June 2022, as disruptions to oil production and transportation pushed diesel and petrol costs upward.
Furthermore, Bank of England research indicates that UK firms anticipate food inflation could climb as high as 7%, reflecting an elevated inflation outlook for the coming year. Other economic indicators have also shown stronger-than-expected activity in the UK economy. The ONS noted that the economy grew by 0.5% in February, surpassing forecasts of 0.1%, before the conflict began. Additionally, UK retail sales volumes exceeded expectations, boosted by fuel purchases as motorists stocked up amid rising prices.
Expert Opinions on Rate Decision
Despite these figures, economists broadly expect the MPC to hold rates steady. Andrew Goodwin, chief UK economist at Oxford Economics, commented: "We expect the MPC to keep bank rate unchanged at 3.75%, with most committee members seemingly keen to hold policy at its current restrictive level as they gather more information about how the energy shock is feeding through to the economy. Nevertheless, we suspect a minority will opt for a 25 basis point (0.25 percentage point) hike, on the basis that some pre-emptive tightening is a more robust strategy to guard against an inflation outlook where the risks are skewed to the upside."
Sandra Horsfield, economist at Investec, added: "We expect the MPC to keep the Bank rate on hold at 3.75% this time, as it did at the March meeting. Whereas military strikes were still under way 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."
Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics, predicted a unanimous hold vote but suggested recent data could drive future concerns over elevated inflation. He stated: "If surveys for May repeat the same pattern, and crucially the 'dirty' Middle East ceasefire continues with oil flows disrupted, we think the MPC will be bumped into a hike in June, or perhaps July. We expect rate setters to hike once this year, in June, before cutting twice in 2027 to leave interest rates at 3.5%."
Context and Outlook
The Bank of England's decision will follow the US Federal Reserve's monetary policy announcement, with economists also expecting rates to remain on hold amid ongoing uncertainty about the economic effects of the conflict. The MPC's cautious approach reflects the delicate balance between supporting economic growth and containing inflation, with the trajectory of the Middle East conflict playing a pivotal role in future policy moves.
