“Only a few weeks ago, a rate cut in March looked like a done deal. But the outlook facing the Bank of England has shifted materially since then.
“Higher global energy prices and renewed supply bottlenecks – stemming from conflict in the Middle East – are likely to push inflation higher in the near term. That could delay a return to the 2% target by almost a year, after the Bank had previously expected inflation to reach that point this summer. It will also weigh somewhat on economic growth.
“Against that backdrop, expectations had already shifted towards rates remaining on hold as the MPC adopts a more cautious “wait-and-see” approach. The key question now is what comes next. The Committee may be less willing to “look through” another temporary energy shock, particularly while the hangover of the last spike is still visible in stickier measures of domestic inflation.
“Much will depend on how the conflict evolves: whether energy prices rise further, how long any increases last, and – crucially – whether households’ inflation expectations begin to move materially higher. With so much still uncertain, the MPC may remain in a holding pattern for at least the next few months, even though there is still a broad inclination within the Committee to lower rates over time.”