Economists at Rabobank say they no longer expect the Bank of England to cut its benchmark interest rate twice this year.

The Middle East conflict has effectively ended any hope of further interest rate cuts this year, a key finding in Rabobank's latest report. If this assessment is accurate, it will help stabilize UK short-term bond yields and support the pound.



Economists at the investment bank had previously predicted that the Bank of England would cut interest rates in March and June 2026, respectively, based on the assessment that weak domestic demand growth and the risk of further weakening of the labor market outweighed the risk of persistent inflation.

However, the five-day conflict in the Middle East has completely overturned these predictions.

"The surge in oil and gas prices has cast doubt on this expectation, and the UK economy will face a negative supply shock unless the situation in the Middle East is resolved quickly," said Stefan Koopman, senior macro strategist at Rabobank.

He pointed out that rising oil prices will quickly transmit to the UK's inflation level, and if this continues, high natural gas prices will further push up inflation from July onwards.

Koopman added, "We have therefore decided to remove the expectation of rate cuts from our 2026 forecast, and we will reassess if the energy market stabilizes sooner than we expect."

The money market has also adjusted accordingly: previously, the market had an 80% probability of an interest rate cut on March 19, but now the probability of a 25 basis point rate cut has dropped to only 25%.

After March, the window for interest rate cuts narrowed further, as April may be the low point for CPI inflation.

The yield on UK two-year government bonds rose significantly this week, from a low of 3.548% to a high of 3.84% on Tuesday, before falling back to 3.72%. This yield is crucial because it is closely linked to Bank of England interest rate expectations and directly reflects investors' judgment on the direction of the benchmark interest rate.

As a key financial product supporting swap and mortgage rates, if the continued downward trend in two-year yields stops, the decline in mortgage rates will also pause.

This could mark a turning point for the pound. The pound/euro exchange rate has previously steadily followed the decline in two-year yields, and its stability, or even a potential rebound, is expected to translate into a higher exchange rate.

ING Bank analysts also released their views on the Bank of England's interest rates today.

They stated that if energy prices remain at current levels in the second quarter, UK inflation could peak at 3.5% this year. However, they believe the Bank of England will postpone rather than completely cancel its interest rate cuts.

James Smith, an economist at ING UK Developed Markets, said: "We now expect the Bank of England's next rate cut to take place in April, although a March cut remains a significant possibility if tensions in the Middle East ease quickly. Given the continued pressure on the labor market, further easing is still more likely than no easing."