Barclays Bank says that the tense Middle East situation leaves the decision to cut interest rates in the UK in March hanging in the balance

Investing.com - Barclays maintains its forecast that the Bank of England will cut interest rates by 25 basis points in March, but warns that this decision has become highly uncertain after escalating Middle East tensions pushed energy prices higher.

According to a research report released by Barclays on Friday, if oil prices average $80 per barrel during March and April, the surge in energy prices could cumulatively raise overall inflation by 0.15 percentage points in those months.

However, this is unlikely to substantially prevent consumer price index inflation from returning to the Bank of England’s 2% target in April.

As of 12:00 GMT on Monday, Brent crude oil was trading at $103.13 per barrel, with market concerns that conflict in Iran could disrupt global oil supplies.

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Changes in natural gas prices will delay their impact on the consumer price index, as the UK energy regulator has already set the price cap for the second quarter. Barclays states that, based on current futures pricing, the third-quarter price cap announced before May 27 could increase by 8% quarter-over-quarter.

This would offset the expected 7% decrease in the second quarter price cap and add 0.23 percentage points to overall inflation in July.

The bank warns that sustained high energy prices could transmit to goods prices through increased transportation costs and potential supply chain disruptions. The duration of these shocks will be crucial, as the 12-day conflict between Israel and Iran in June 2025 is expected to have minimal macroeconomic impact due to its short duration.

Barclays notes that the Monetary Policy Committee needs to weigh past data against the potential persistence of energy price shocks, domestic economic weakness, and the value of delaying rate cuts to see if uncertainties diminish.

The bank expects that the labor market data to be released on March 19 will be weaker than the MPC’s February forecast. Barclays believes that the 12 days before the MPC’s decision provide a reasonable window for Middle East uncertainties to subside, supporting their rate cut expectations, although they describe this decision as still uncertain.

Survey data shows that expectations for one-year consumer price index inflation in February decreased by 0.1 percentage points to 3.1% on a three-month rolling average basis. The three-year expectations also fell by 0.1 percentage points to 2.8%. However, this survey was conducted from February 6 to 20 and does not reflect recent energy price changes.

The Chancellor’s spring statement on Friday did not announce any policy changes. The Office for Budget Responsibility downgraded the near-term growth forecast for 2026 to an average of 1.1%, down 0.3 percentage points, but offset this with projected growth of 1.6% in 2027 and 2028. Inflation expectations for 2026 were lowered to an average of 2.3%.

The fiscal surplus is expected to reach £23.7 billion in the 2029-30 fiscal year, providing the Chancellor with about £2 billion more room under his fiscal rules. Public sector net borrowing for this fiscal year was revised down to 4.3% of GDP.

Barclays expects the January monthly GDP data to be released on March 13 will show a quarter-over-quarter increase of 0.1%, with industrial production up 0.2% and services up 0.1%.