The Bank of England will choose its words even more carefully than usual this week alongside its expected decision to delay an interest rate cut in the face of inflation risks from the war in the Middle East. Still stung by criticism that it and other central banks moved too slowly when Russia's full-scale invasion of Ukraine drove British inflation above 11% in 2022, the BoE will be wary of missteps. Get a daily digest of breaking business news straight to your inbox with the Reuters Business newsletter. Sign up here. Advertisement · Scroll to continue
Governor Andrew Bailey and his colleagues can only wait to see how long the U.S.-Israeli war on Iran lasts, and how persistent the jump in oil and gas prices will be. That means bets on a rate cut on Thursday, at the end of the Monetary Policy Committee's March meeting, are now off. Economists polled by Reuters mostly expect a 7-2 vote by the MPC to keep Bank Rate at 3.75%. Before the start of the war on February 28, a cut to 3.5% was seen as a near certainty. INFLATION NOW SEEN AT 3-4% Britain's economy was facing a risk of weak growth and stubborn inflation pressures even before the crisis in the Gulf, which has once again exposed the country's heavy reliance on imported natural gas. Advertisement · Scroll to continue
Analysts say the direct impact of higher energy prices is likely to push British inflation to about 3-4% by the end of 2026, if oil and gas prices stay at current levels, up from previous forecasts of around 2%, the BoE's target. More worrying for the central bank, it could also drive up the public's still elevated inflation expectations, making it harder for the BoE to say it will look through any short-term inflationary effects. A Reuters poll of economists last week showed no consensus on when the BoE was likely to cut Bank Rate. Dani Stoilova, UK and Europe economist with BNP Paribas Markets 360, said she thought only one more cut was possible, and only if oil prices fall from their level now of around $100 a barrel to under $80. "There might still be a pathway for them to deliver a final rate cut to 3.5% over the next few months, but it's looking narrower and narrower by the day," Stoilova said.
