The Bank of England's interest rate decision, to be announced at 20:00 on Thursday (March 19), is expected to keep the benchmark interest rate unchanged at 3.75%, completely changing the almost certain expectation of a rate cut before the outbreak of the Middle East war.

Seven of the nine members of the Monetary Policy Committee (MPC) are likely to vote to keep rates unchanged. There will be no press conference or new economic forecasts following this meeting; investors will be closely watching the committee members' statements to gauge any shifts in their views.

High oil and gas prices could push inflation back to 3% or even higher, exacerbating persistent price pressures.

Since 2024, the Bank of England has been cutting interest rates more slowly than the European Central Bank, mainly due to concerns about more persistent price pressures in the UK.

Just as the UK inflation rate seemed poised to fall to and remain at the 2% target, the Middle East conflict caused oil and gas prices to surge, potentially pushing inflation back to 3% or even higher.

Although this level is well below the 2022 peak of 11.1%, the energy shock has spread from gasoline and jet fuel to transportation, chemicals and agriculture, pushing up core inflation and the cost of living.

Investors have abandoned expectations of two rate cuts this year, and the possibility of a rate hike before November is now considered high.

Investors have abandoned expectations that the Bank of England will cut interest rates twice this year, and on Wednesday the market even considered a rate hike before November as highly probable. This shift reflects soaring energy prices and renewed inflation expectations, which have significantly delayed the path of rate cuts.

Futures market pricing indicates that the main trend will remain unchanged in the short term, with expectations of interest rate cuts postponed until mid-year or later, and the tail risk of interest rate hikes increasing.

The UK economy is fragile, with high unemployment; the MPC faces a difficult trade-off between inflation and employment.

James Moberly, senior economist at Goldman Sachs UK, said: “We believe the threshold for raising interest rates remains high. Unlike in 2022, current monetary policy started off tight, and unemployment is already high, forcing the MPC to make trade-offs between different objectives.”

The UK economy is fragile, with high unemployment and a weak job market, making continued easing necessary. However, persistent inflation and the energy shock limit the scope for further rate cuts. The MPC (Medium-term Interest Rate Control) is struggling to balance its dual mandate, making a pause in rate cuts in the short term the most likely option.

Goldman Sachs expects a rate cut in July, provided the Hormuz interruption is resolved quickly.

Goldman Sachs expects the Bank of England to cut interest rates in July, provided the shipping disruption in the Strait of Hormuz is resolved quickly. If the conflict continues and energy prices remain high for an extended period, inflation expectations could spiral out of control, further delaying the rate cut.

Moberly emphasized that the current uncertainty is extremely high, and the MPC forward guidance may be too vague to give a clear signal for the next step.

No press conference, no new predictions, committee members' speeches become the focus.

The resolution will be announced at 8:00 PM Beijing time, but there will be no press conference or new economic forecasts. Investors will carefully study the statements of each committee member to determine if their views have changed.

Analysts expect most committee members to refrain from issuing clear signals regarding the next steps, and the MPC statement may remove recent guidance on potential further interest rate cuts. Vague forward guidance will become the norm, and the market will need to rely on individual committee members' statements to discern hawkish or dovish signals.

Forward guidance may be somewhat vague, significantly increasing uncertainty about the interest rate path.

The Middle East conflict has further clouded the Bank of England's outlook, with both rising inflation and slowing growth risks present. The lack of a press conference and new forecasts following the decision, coupled with vague forward guidance, will exacerbate market uncertainty.

Oil price movements remain dependent on the duration of the conflict and the resumption of air traffic through the Strait of Hormuz. A prolonged disruption would amplify inflationary pressures and further expose the vulnerabilities of the UK economy. Investors should be wary of any hawkish rhetoric from committee members that could trigger tighter financial conditions, and should closely monitor energy price dynamics and geopolitical developments.

Editor's Summary

The Bank of England is expected to keep interest rates unchanged at 3.75% at its meeting on Thursday, with expectations of a rate cut virtually disappearing. The market even considers a rate hike before November to be highly probable. The Middle East conflict has caused oil and gas prices to surge, potentially pushing inflation back to 3% or even higher.

With a fragile UK economy and high unemployment, the MPC faces a difficult choice between persistent inflation and weak employment. Goldman Sachs expects a rate cut in July, provided the Hormuz crisis is resolved quickly.

There was no press conference or new forecasts following the resolution, and forward guidance may remain vague. The focus will be on the committee members' speeches; any hawkish signals could exacerbate tightening of financial conditions. Investors need to closely monitor energy price dynamics and geopolitical developments, as short-term volatility is extremely high, and uncertainty surrounding the medium- to long-term interest rate path has increased significantly.