LONDON, March 19 - The Bank of England’s nine members of the Monetary Policy Committee voted unanimously on Thursday to maintain the current level of interest rates, citing uncertainty about inflationary pressures tied to the war in the Middle East. While the committee held rates steady, several officials signalled that a return to tightening is possible if energy price pressures prove persistent, a stance that prompted an abrupt reassessment in financial markets.
Investors responded to the Bank’s message by aggressively selling short-dated UK government bonds. Two-year gilt yields climbed 27 basis points on the day to 4.38%, near one-year highs, reflecting expectations of an elevated interest rate path. Sterling ended the trading session stronger, trading at about $1.3297 and roughly 86.30 pence per euro.
Money market prices shifted markedly after the meeting. Traders now price in two 25 basis point rate increases by the end of the year. Before the announcement, market participants had fully priced in a single rate rise for 2024 and placed the probability of a second hike at about even odds.
The vote and the view from the committee
All nine policymakers voted to keep borrowing costs on hold. That unanimity - moving from a split seen at the previous meeting - underlines a shared inclination to await clearer signals on how the conflict and resulting energy market movements will influence inflation and growth.
Commentary from market and economic analysts highlighted how the Bank’s tone read as more hawkish than some had anticipated. Lee Hardman, senior currency analyst at MUFG in London, said: "The message is more hawkish than the market had been anticipating, with the BoE indicating that if the energy price shock looks to be more persistent then they have to act to tighten policy to stop inflation expectations becoming unanchored. The situation is very uncertain, but the messaging is they certainly look more likely to respond than say the Fed."
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services in France, described the dilemma facing policymakers: "The question asked prior to the meeting’s commencement was whether the conflict might delay anticipated rate cuts, prevent them indefinitely, or even cause them to be reversed. Fast-moving developments have resulted in skittish financial markets edging to the latter position, but not imminently. As ever, senior Bank officials have a tightrope to walk. While sustained high energy prices would cause price pressures to rise, the UK economy has continued to struggle at the outset of the year and hardly needs a policy tightening which might only serve further to limit any revival down the road."
Labour market, inflation outlook and internal views
Policy discussions reflected an interplay between a cooling labour market and a potentially more challenging inflation outlook. Luke Bartholomew, deputy chief economist at Aberdeen in London, noted the significance of the unanimous decision and the committee’s preference to monitor developments before loosening policy again: "What is striking is that all policymakers voted to keep policy on hold, which shows that even the more dovish members of the committee want to see how this conflict plays out before cutting again. With today’s labour market data showing wage growth is continuing to moderate, there is certainly a strong case for bringing rates down eventually. But with the inflation outlook now looking more challenging, the Bank will be focused on keeping inflation expectations pinned down. So while the hurdle to a return to rate hikes is very high, the economy could be facing a long wait until the next cut."
JPMorgan Private Bank’s global investment strategist Madison Faller noted the Committee’s shift toward consensus: "After months of division, the Committee is now more united in holding rates steady, voting a unanimous 9-0 versus February’s tight 5-4 split. Policymakers have converged on controlled caution. The question is how long the economy can afford to wait. In turn, a dovish BoE stance is likely to keep a lid on sterling gains, especially if investors continue to seek out the dollar as a safe haven."
Market and economic implications highlighted by analysts
Analysts emphasised the prudence of the Bank’s stance given the unpredictability of the conflict and its potential to push up energy costs. Kallum Pickering, chief economist at Peel Hunt in London, described the unanimous hold as "sensible" and argued that in the absence of a clear signal on the conflict’s duration, allowing markets to adjust to new information is the prudent course: "Any judgement on whether rates should go up or down - which are both possible next outcomes - are simply a function of how long the war lasts and at this stage, there’s no basis to make that judgement beyond pure speculation. In which case, it is absolutely prudent that the Bank of England allows markets to do their job, which is to adjust to information in real time, and to allow for both possibilities and this does that."
Sylvain Broyer, chief EMEA economist at S&P Global Ratings in Frankfurt, outlined a defensible stance for a prolonged wait-and-see approach given weak growth and receding inflation: "Given the UK’s backdrop of weak growth and slowly receding inflation, a prolonged 'wait and see' approach through the rest of the year would be defensible. We expect the BoE to delay its next rate cut until December."
Ed Hutchings, head of rates at Aviva Investors in London, pointed to the added difficulty the conflict has created for the previously divided MPC and said that the probability of a rate hike in the coming months has increased: "The Iranian war has certainly made decisions far more difficult for a divided MPC, who for now are more in favour of seeing how the situation develops, giving themselves time to assess both the growth and inflation dynamics. It’s fair to say that we have seen a reversal in the outlook for UK rates, and that the chances of a rate hike from the BoE over the coming months have increased."
David Rees, head of global economics at Schroders, flagged the sensitivity of headline inflation to higher energy prices and potential fertiliser shortages: "Much will now depend on how high energy prices go, and for how long they remain elevated. But the current levels of oil and gas prices are already enough to add around 1% to headline inflation in the coming months, while shortages of fertilisers could push food inflation higher later in the year."
Outlook
The unanimous hold combined with cautionary language about energy-driven inflation has altered market positioning. Short-term government bond yields have climbed and market-implied probabilities of multiple rate hikes have risen. The Bank of England appears to be balancing the risk that persistent energy shocks could unanchor inflation expectations against evidence of a cooling labour market and weak growth. How energy prices evolve and how long elevated levels persist will be a central determinant of the policy path ahead.