Results contrast with Standard Chartered and Morgan Stanley’s revised expectations
Bank of England rate-cut expectations have been revised again – but there are conflicting forecasts in the air as the Middle East uncertainty weighs heavy on inflation.
Two major global banks have warned that the surge in oil and gas prices linked to the latest Middle East tensions risks reigniting inflation rather than allowing a smooth retreat in borrowing costs.
Certainly, lenders have taken note. As widely reported, hundreds of mortgage products have been withdrawn from the market at short notice while the average cost of fixed-rate residential borrowing has pushed beyond 5%.
Standard Chartered and Morgan Stanley now both expect the first reduction in Bank Rate to come in the second quarter, abandoning earlier calls for an immediate move in March.
But an ongoing Mortgage Introducer poll revealed that 53% expect no rate cuts from the Bank of England this year, while 33% expect only one. Cast your vote here before the end of the week.
The combination of higher rates, less products and no central bank rate cut on the horizon makes sobering reading for those hoping for a clearer, earlier easing cycle to underpin cheaper funding and a busier remortgage market.
The Iran conflict and its impact on oil prices are at the heart of the industry sea change. According to Morgan Stanley’s latest research, benchmark energy prices have jumped sharply since late February, with oil and gas rising by roughly 50% and 90% respectively on Standard Chartered’s estimates. That escalation, driven by fears over supply disruption, threatens to push up headline inflation and thwart the Bank of England’s task of declaring victory over price pressures.
Interest-rate futures now imply the Monetary Policy Committee (MPC) is overwhelmingly likely to keep Bank Rate unchanged at its March meeting. Standard Chartered has shifted its call for an initial reduction from March into the second quarter and has lowered its projection for total cuts by a quarter of a percentage point by the end of 2026. It still expects Bank Rate to settle at about 3.25% by that point, 0.5% down from its current position of 3.75%.
Morgan Stanley has made a similar move, scrapping its forecast for a March cut and instead pencilling in an initial move in April, followed by further reductions in November and in February 2027. Compared with its previous view of cuts in July and November this year, that implies a later start and a slower progression of easing.
Bank of England's dilemma
The shift in expectations underlines the awkward position the MPC finds itself in. On one side, growth remains lacklustre and higher borrowing costs are still feeding through to households and businesses via refinancing. On the other, renewed energy-driven inflation risks make it harder to justify a swift turn towards looser policy.
Unless the energy spike fades quickly, the Bank is more likely to adopt a wait-and-see stance in March and potentially in May, looking for stronger evidence that underlying inflation pressures are contained and that second-round effects from higher energy costs are limited.
Standard Chartered has warned that a prolonged period of elevated energy prices could add materially to eurozone inflation. Investors see Britain as particularly vulnerable, however, given its reliance on energy imports and the already stretched state of the public finances. The Mortgage Introducer poll, however, suggests mortgage market optimism has been punctured by the geopolitical impact of the Iran conflict - time will tell whether this is a short-term or long-term state of play.
