Markets have sharply reduced expectations for Bank of England rate cuts after a new round of energy-market disruption in the Middle East, according to an analysis by Deutsche Bank strategists. The change represents the most pronounced repricing among major central banks so far this month.
At the end of February, markets were pricing in more than two full interest-rate cuts by the BoE through the end of 2026. By Tuesday morning, that outlook had narrowed dramatically: just over 10 basis points of easing were priced for the full year.
The strategists attribute the reversal to fears that inflation expectations may remain elevated, limiting the Monetary Policy Committee's willingness to look through the energy shock and continue cutting interest rates. At the end of last month, the BoE had been seen as comparatively dovish versus peers, both in absolute terms and on a spot real-rate basis - calculated as the policy rate minus the six-month annualised change in core CPI.
That earlier dovish tilt reflected a constellation of factors: market expectations that UK inflation would decline in coming months, ongoing concerns about the labour market, and the MPC's stance at its most recent meeting, when members voted 5-4 to hold rates.
Volatility has been high across multiple market segments in March as participants digest developments in Middle East energy markets. Fixed income, commodity and currency markets have all experienced pronounced swings, and almost every G10 central bank has been repriced in a more hawkish direction. Within this broader move, Deutsche Bank's team finds the BoE has undergone the largest single adjustment.
On an inflation-adjusted real-rate basis, the bank's analysis indicates there is now little to no dovish risk premium priced for the MPC relative to other central banks. That change in the relative pricing appears to have influenced currency flows as well.
From the currency viewpoint, Deutsche Bank notes that terms-of-trade effects have dominated relative performance between economies. In the United Kingdom's case, the scale of the repricing versus peers, combined with an unwind of short positions, has likely provided near-term support to the pound. The strategists caution, however, that if energy prices fall and front-end rates reverse, that source of support for sterling could dissipate.
The pattern of repricing underlines how sensitive monetary expectations have become to energy-market developments, with implications reaching across fixed income, commodity and currency markets.