Expectations of further Bank of England base rate cuts this year have been thrown into doubt after escalating conflict in the Middle East triggered sharp rises in energy prices and government bond yields, raising fears of a fresh inflationary shock.
Only a week ago, markets were confident that the Bank of England would cut rates again at its March meeting, with traders pricing in an 86 per cent probability of a 0.25 percentage point reduction. Now, following military escalation involving the US and Iran and renewed instability across the Gulf region, those expectations have collapsed. Markets are currently assigning less than a 5 per cent chance of a rate cut this month and less than a 50 per cent probability of a move in April.
The Bank’s base rate currently stands at 3.75 per cent, having been reduced four times in 2025 as inflation fell to 3 per cent. Governor Andrew Bailey had previously suggested that a return to the 2 per cent target was “baked in”. However, the geopolitical shock has materially altered that outlook.
UK wholesale gas prices have surged by around 40 per cent in recent days, while oil prices have approached $80 per barrel. Two-year gilt yields have risen to their highest levels since December as markets reassess the inflationary impact of higher energy costs.
The risk, analysts say, is that sustained disruption to global energy supplies, particularly through the Strait of Hormuz, could keep inflation elevated for longer, forcing the Bank of England to pause or even reverse its easing cycle.
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