Bank of England holds steady, market fully prices in two rate hikes!

Question AI · How Middle East conflict prompts UK to vote unanimously for the first time?

Middle East conflict heats up affecting monetary policy! The Bank of England’s Monetary Policy Committee (MPC) has for the first time in four and a half years reached a completely unanimous decision, with even the most steadfast “dove” members turning hawkish amid uncertainty.

On Thursday, the MPC voted 9-0 to keep the benchmark interest rate unchanged at 3.75%. This is the first time in four and a half years the committee has reached full consensus. Traders have raised expectations for further rate hikes, fully pricing in a total increase of 50 basis points by 2026.

However, behind this calm voting result lies deep concern over global geopolitical risks: officials explicitly stated they are “ready and prepared” to respond to any new inflation wave triggered by the Middle East conflict.

The meeting minutes show a significant shift in stance. As the Middle East conflict threatens the world’s most important oil-producing region and the Strait of Hormuz, the Bank of England officially refrained from mentioning “rate cuts.” In this statement, the committee removed the language from February’s decision about the possibility of “further rate reductions,” replacing it with a cautious tone on inflation risks.

Bank of England Governor Andrew Bailey firmly stated that monetary policy must effectively address the more persistent risks of UK CPI inflation. He emphasized: “Whatever happens, our duty is to ensure inflation returns to the 2% target.”

Market sentiment reversed amid volatile energy prices. On Thursday morning, due to Iran missile attacks damaging the world’s largest liquefied natural gas export plant, European natural gas futures surged by as much as 35%.

This uncertainty even caused the most dovish members within the central bank to lean hawkish. Swati Dhingra, who has traditionally advocated for easing, said that if energy supplies face long-term shocks, rate hikes will be necessary. The minutes reveal that if the Middle East conflict had not suddenly erupted, several members had planned to vote for a rate cut this meeting.

Monetary Policy Committee member Mann considered delaying the pause and even raising rates once. But another member, Taylor, believed the threshold for hikes was very high.

Due to rising oil prices, the Bank of England has significantly upgraded its short-term inflation forecasts. The bank now expects UK inflation to accelerate to 3.5% in March, about 0.5 percentage points higher than pre-war expectations.

Bailey pointed out that unstable conditions have already transmitted through rising gasoline prices to UK consumers and could further push up household energy bills later this year. Although the committee acknowledged that monetary policy cannot intervene in global energy price surges, they remain highly alert to the “second-round effects” (i.e., wage-price spirals triggered by energy inflation).

This swift shift by the Bank of England reflects a hard lesson learned from the inflation runaway after the Russia-Ukraine conflict in 2022. At that time, UK inflation soared into double digits, and the bank was heavily criticized for being too slow to raise rates.

Globally, the UK is not alone. The Federal Reserve announced on Thursday to hold rates steady, with outgoing Chair Powell stating that it is too early to assess the war’s impact on the US economy; the European Central Bank is also expected to maintain current policy later today.

Despite some softening in the UK labor market over recent quarters, faced with high geopolitical inflation risks, the Bank of England has evidently chosen a cautious approach. The market’s expectation of an easing cycle in the near term seems unlikely to materialize.