The Bank of England remains on hold, with the market fully pricing in two rate hikes!

On Thursday, the Bank of England's Monetary Policy Committee (MPC) unanimously voted 9-0 to keep the benchmark interest rate unchanged at 3.75%. This marked the first time in four and a half years that the committee reached a full consensus. Traders have raised their expectations for interest rate hikes by the Bank of England, fully pricing in a cumulative 50 basis points increase by 2026.

However, behind the calm voting outcome lies deep concern from the Bank of England about global geopolitical risks: officials have made it clear that they are "on high alert," ready to address a potential new wave of inflation triggered by conflicts in the Middle East.

The minutes of this meeting revealed a significant shift in stance. As the conflict in the Middle East threatens the world’s most critical oil-producing region and the strategically important Strait of Hormuz, the Bank of England has officially stopped mentioning "rate cuts." In this statement, the committee removed references to the possibility of further rate cuts included in the February decision, replacing them with warnings about upward price pressures.

Bank of England Governor Andrew Bailey delivered a firm statement, emphasizing that monetary policy must be effective in addressing the more persistent risks of UK CPI inflation. He stressed: "No matter what happens, our duty is to ensure that the inflation rate returns to the 2% target level."

The reversal in market sentiment was confirmed by fluctuations in energy prices. On Thursday morning, European natural gas futures surged by 35% after Iranian missile strikes damaged the world’s largest liquefied natural gas export facility.

This uncertainty has even led the most steadfast "dovish" members within the central bank to shift towards a hawkish stance. Swati Dhingra, who has consistently advocated for easing, stated this time that a rate hike would be necessary if energy supplies were to face prolonged disruptions. The minutes revealed that several members had planned to vote for a "rate cut" at this meeting, had it not been for the sudden outbreak of conflict in the Middle East.

Monetary Policy Committee member Mann considered extending the period of inaction, "or even implementing a single rate hike." However, another committee member, Taylor, believed the threshold for raising rates remains high.

Due to rising oil prices, the Bank of England has significantly raised its short-term inflation forecasts. The central bank now expects the annual rate of price growth in the UK to accelerate to 3.5% in March, approximately 0.5 percentage points higher than pre-conflict projections.

Bailey pointed out that the volatile situation has already affected UK consumers through rising gasoline prices and may further push up household energy bills later this year. Although the committee acknowledged that monetary policy cannot directly intervene in the surge of global energy prices, they remain highly vigilant against "second-round effects" (i.e., wage and price spirals triggered by rising energy costs).

This swift pivot by the Bank of England reflects the profound lessons learned from the aftermath of the Russia-Ukraine conflict in 2022 when inflation spiraled out of control. At that time, UK inflation soared into double digits, and the central bank faced heavy criticism for being too slow to raise rates.

The UK is not alone on the global stage. The Federal Reserve announced on Thursday that it would keep interest rates unchanged, and outgoing Chair Powell stated that it is too early to assess the impact of the war on the US economy; the European Central Bank is also expected to maintain its current policy later today.

Although the UK labor market has shown some weakness in recent quarters, faced with elevated geopolitical inflation risks, the Bank of England has evidently opted for a safety-first approach, making it unlikely for the market-anticipated monetary easing cycle to commence in the short term.

Editor/Doris