The Monetary Policy Committee (MPC) will meet today to determine whether the Bank of England Base Rate will change. Economists widely expect the MPC to keep interest rates at 3.75%.
The base rate significantly affects mortgage and loan costs and influences the interest rates banks offer on savings accounts. It peaked at 5.25% in late 2023, but policymakers have since reduced it, as inflation has dropped to more manageable levels. The Consumer Price Index (CPI) inflation rate is currently rising at a pace of 3% – far lower than the 11% highs seen during 2022’s energy crisis, but still higher than the Bank’s 2% target. The Bank of England typically raises interest rates when inflation is high to curb spending and slow price increases.
As the conflict in the Middle East escalates, higher oil prices are expected to push headline inflation higher. Since the US and Israel’s strikes on Iran began on February 28, disruption around the Strait of Hormuz – which carries around a fifth of the world’s oil and gas – has rattled global supply.
Major producers have been suspending output, sending oil prices sharply higher and adding more than 8p a litre to UK forecourt prices in just three weeks.
Policymakers are widely expected to hold interest rates at 3.75%. Before the conflict, a reduction was anticipated as inflation was projected to fall, providing welcome relief to mortgage holders.
Charlie Ambler, co-chief investment officer at wealth management firm Saltus, said the conflict “is a direct threat to the Bank’s slow and steady rate-cutting cycle, with markets now increasingly pricing in a change of course.”
He continued: “The consensus is that rates will be held at 3.75% this week, with hikes later this year now being priced in by the market. However, this depends entirely on how long the conflict goes on and oil prices remain elevated. While markets will be looking for reassurance amid this uncertain backdrop, any forward guidance will likely remain cautious.”
Aaron Shinwell, chief lending officer at Nottingham Building Society, added: “While interest rates had been on a gradual downward trajectory, the ongoing situation in various regions has introduced a high degree of uncertainty.
“The expectation is that the Bank of England will maintain the current base rate of 3.75% this week. However, the path forward is far less clear beyond that.”
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