The Bank of England (BoE) is expected to delay its interest rate cut plan at its March 19 meeting due to the surge in global energy prices triggered by the Iran war. Economists now predict the first rate cut will only occur in the second quarter, either in April or June.
Inflation concerns have resurfaced after Brent crude oil prices surged back above $100 a barrel. This has erased previous market expectations of a near certainty (90%) of a rate cut in March, forcing the BoE to take a more cautious approach.
A Reuters poll showed that a majority of economists now expect the BoE to keep rates at 3.75% for now. Although inflation eased to 3.0% in January, oil price shocks in the Middle East are feared to prevent inflation from reaching the central bank's 2% target in the near future.
Despite the rising inflation risks, weakness in the labor market is a counterbalancing factor that still supports the argument for a rate cut this year. The UK unemployment rate has reportedly hit a ten-year high, excluding the pandemic phase, which has put pressure on the domestic economy.
Overall, the median forecast suggests interest rates could end up at 3.25% by the end of 2026. However, strategists have warned that continued geopolitical uncertainty could lead the BoE to scrap its easing plans altogether if inflation remains high.
