The BoE catches markets by surprise
That said, no change in rates was always likely, given the recent outbreak of hostilities in the Middle East and an associated jump in energy costs. More important for traders was any guidance accompanying today’s decision, and this saw an overhaul relative to February, a fact that has seemingly cau
The MPC left Bank Rate unchanged following the March policy meeting, matching consensus expectations and our own house call.
That said, no change in rates was always likely, given the recent outbreak of hostilities in the Middle East and an associated jump in energy costs. More important for traders was any guidance accompanying today’s decision, and this saw an overhaul relative to February, a fact that has seemingly caught markets by surprise.
The result has been a sharp jump in Gilt yields, with the 2-year adding 34bps so far today as of writing, on track for the largest single-day jump since 2022 and the Liz Truss mini-budget debacle. Market expectations now see the MPC hiking rates three times in 2026 as a base case, taking Bank Rate back to 4.50% by year-end.
Having read the statement and the minutes of this MPC meeting, we are left a little puzzled by the aggressive repricing in rate expectations. Granted, the Committee voted 9-0 to hold rates, a more hawkish outcome than the 7-2 split that a plurality of economists had predicted. And it is notable that the MPC altered the structure of the minutes to focus on the conflict in the Middle East, and the potential economic implications. That said, we do not see this as surprising, nor are the conclusions radical.
Based on energy prices taken just prior to this decision, Bank staff suggested that CPI inflation could increase to up to 3½% in Q3, with little certainty on second-round effects.That seems sensible to us and is in keeping with our own back-of-the-envelope estimates.
It was with this in mind that we expected the MPC to broadly favour leaving rates unchanged this month, adopting a wait-and-see approach. The committee voted in February to hold only by the narrowest of margins, and, with a clear easing bias. That was prompted by a domestic backdrop that remains broadly unchanged at this meeting, seeing anaemic growth and building labour market slack, both of which should weigh on inflation. As such, we are inclined to see this pause as less hawkish pivot, and more a necessary step in the Bank’s evidence gathering exercise, given the increased uncertainties stemming from geopolitical events. Indeed, we think the minutes support our view, noting that
“Members agreed that developments over the next six weeks could shed light on the likely scale and duration of the conflict, as well as providing some early evidence on the likely propagation of the shock.”
While this is not an endorsement of further rate cuts, it is far from committing to a hiking cycle either. Yet that is what traders now have priced for Bank Rate, with 2-3 policy rate increases expected by the end of 2026. We would not rule this out, especially if energy prices continue to climb sharply. But we do not see that as a reasonable base case given an already restrictive BoE policy stance, expectations for a modest, temporary rise in energy inflation, and a domestic economy that scans as weak in our eyes.
We remain of the view that the next MPC move will likely be to cut rates, though April now looks less probable barring an imminent cessation in hostilities in the Middle East, meaning we will be reviewing our expectations for the BoE over the coming days. In any case, the sterling reaction to today’s decision is also, we think, noteworthy.
The pound failed to pick up meaningful support, despite perceived BoE hawkishness. That suggests limited scope left for the sterling to make gains in the current environment, leaving the short-term risk profile for the pound skewed squarely to the downside.