‘No one expects’ Bank of England to cut interest rates, says former MPC member
A former member of the Bank of England’s Monetary Policy Committee (MPC) has said that “no one expects a cut” to interest rates amidst deepening conflict in the Middle East.
Prof Jonathan Haskel, who is also a member of Morning Wire’s Shadow Monetary Policy Committee, told BBC Radio 4’s ‘Today’ programme he believes a rates cut is “completely off the table”.
Haskel said that geopolitical volatility is likely to sway committee members to wait for more data before any future rate cuts: “Those people saying the economy is weak will say this will weaken the economy further and therefore we should have a cut.
“Those people who want to hold because they feel there is already too much inflationary pressure, will say this is imparting even more inflationary pressure.”
This comes amid widely held expectations from economists that the Bank is “almost certain” to hold interest rates, as President Donald Trump shows little sign of calling an end to the war in the Middle East.
The MPC will meet this Thursday and decide whether to hold, hike or cut the base rate, which currently stands at 3.75 per cent – the lowest level in nearly three years.
Economists across the board had pencilled in a cut for the next meeting after inflation eased to three per cent in January marking ts lowest rate since last March.
But the outbreak of war in the Middle East has fanned the inflation flames after energy prices were sent soaring due to global disruption to oil and gas.
Sanjay Raja, chief UK economist at Deutsche Bank, forecast the MPC will adopt a “dovish ‘wait-and-see’ approach” in their next meeting.
“We anticipate a less divided vote than in February…
“This shift, we think, will be driven by the change in perception of downside risks to inflation and a change in risk management considerations due to the energy price shock.”
Edward Allenby, senior UK economist for Oxford Economics, agreed, stating “the conflict in the Middle East has thrown a spanner in the works”.
“Against this backdrop, it’s almost certain that the MPC will keep bank rate unchanged at 3.75 per cent at the March meeting,” Allenby said.
“If the shock proves short-lived and recent price rises fully reverse, we still think there’s a reasonable chance that the MPC will resume its cutting cycle either in April or June.”
Economists warn of long conflict as Trump dismisses deal
Economists are now turning to the longevity of the conflict as the deciding factor of how the Bank’s interest rate cutting cycle with play out.
Analysis from Oxford Economics has suggested the UK could be plunged into a recession should the price of a barrel of oil jump to $140, and remains at the elevated price until at least May.
Oil closed above $100 for the first-time since 2022 on Thursday and ended the week above $103.
President Trump has also doubled down on the war and said he is unwilling to make a deal with Iran.
“Iran wants to make a deal, and I don’t want to make it because the terms aren’t good enough yet,” he said, adding that any terms will have to be “very solid.”
The regime in Tehran has threatened to prevent “one litre of oil” from leaving the region amidst the strikes from the US and Israel and have continued to block the Strait of Hormuz – which a fifth of the world’s oil supply flows through.
Philip Shaw, chief economist at Investec, said: “For now we have not shifted our baseline call of an easing in both April and July, but this is dependent on not only the war ending within a few weeks, but also a relatively orderly transition subsequently towards the normalisation of energy production and distribution.
“The risk seems to be that the situation unfolds over a longer timeframe and while for the moment we are not taking the risk of a hike this year as seriously as markets, it is conceivable that hopes for lower interest rates are killed off for a number of months more.”
Raja said that despite inflation risks being “skewed firmly to the upside” it would still take “a lot” for the Bank to hike rates.
Deutsche Bank has forecast two rate cuts to still take place for the rest of the year, but “contingent on more evidence of falling core inflation and a potential resolution of the Iran conflict”.
Ashley Webb, UK economist at Capital Economics, said the Bank of England would deal with the inflationary impact of the Middle Easy conflict by holding rates at 3.75 per cent, but added the “rise in market interest rate expectations has gone too far”.