Interest rates set to be held steady as Iran war clouds inflation outlook

UK borrowing costs are set to stay the same as concerns about the impact of the Iran war on inflation put any plans for a cut on ice, economists think.

The Bank of England is widely expected to keep interest rates unchanged at 3.75% on Thursday.

Some economists had been expecting policymakers to deliver a cut, prior to the escalation of the war in Iran.

The pivot reflects the changing outlook for energy costs on the back of soaring oil and gas prices in recent weeks, and the potential for this to weigh on UK inflation.

The Bank is forecasting Consumer Prices Index (CPI) inflation to fall close to 2% by April, but experts say price rises could accelerate towards the second half of the year should higher wholesale gas and oil prices feed through into steeper household electricity and fuel costs.

The Office for Budget Responsibility (OBR), the Government’s official forecaster, warned earlier this week that one percentage point could be added to UK inflation this year, should the current energy price spike persist.

Edward Allenby, senior UK economist for Oxford Economics, said: “The UK inflation outlook was starting to brighten, but 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% at the March meeting.

“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.

“However, if the surge in energy prices persists or goes higher, the MPC will be set for an extended pause.”

Thomas Pugh, chief economist for RSM UK, agreed that the recent events will have taken a rate cut off the table this month, and potentially also for April.

He said: “Reflecting the scale of volatility we’re all coming to terms with, it was only two weeks ago that a March rate cut looked like a dead cert.

“A cut clearly makes no sense now.

“Given uncertainty about the outlook for energy prices, inflation and the economy, the most sensible thing for the Bank of England to do now is wait for more clarity.

“This rules out a rate cut next week and probably one in April too, unless there’s a rapid resolution to the crisis.”

A wave of Britain’s biggest lenders have been hiking mortgage rates on the back of the conflict, prompted by a sharp rise in swap rates, which are used to price mortgages.

Financial information website Moneyfacts said that major lenders no longer offer sub-4% fixed-rate deals – which had been available to borrowers just last week.

Across the mortgage market generally, there were 689 fewer products on the market on Tuesday, compared with March 9.

The Bank of England’s decision will come a day after the US Federal Reserve announces its own interest rates, which are also widely expected to be held steady amid the heightened uncertainty.