BoE Holds Rates at 3.75% as Inflation Risks Rise

The Bank of England unanimously voted to keep the Bank Rate at 3.75% in March 2026, as the conflict in the Middle East has caused a sharp rise in global energy and commodity prices, pushing up household fuel and utility costs and raising business expenses. Prior to this shock, domestic prices and wages had been showing continued disinflation. The MPC is closely monitoring the risk of second-round effects on wages and prices, which could increase the longer energy costs remain high. Recent data showed headline inflation at 0.1% in February, with medium-term pressures largely unchanged. Higher energy prices are expected to push CPI to between 3% and 3.5% over the next few quarters, though a slowdown in economic activity from rising costs could limit second-round effects. The Committee will continue to assess developments in the Middle East and global markets, ready to adjust policy as needed to maintain price stability and support sustainable growth.

The BoE is expected to keep interest rates unchanged at 3.75%, as policymakers assess rising inflation risks linked to the Middle East conflict. The sharp increase in oil and gas prices has complicated the outlook, pushing inflation expectations higher and prompting markets to abandon earlier bets on a near-term rate cut. Prior to the escalation in geopolitical tensions, a reduction to 3.50% had been seen as highly likely, but that conviction has faded as energy prices climbed above $100 per barrel and uncertainty over the duration of the conflict persists. The Monetary Policy Committee is therefore expected to adopt a cautious tone, potentially adjusting its forward guidance to emphasise data dependency rather than signalling imminent easing. Investors will closely scrutinise policymakers’ comments for clues on how persistent they expect inflationary pressures to be. While most economists still expect rate cuts later in the year, the timing and extent remain highly uncertain.

The Bank of England kept its Bank Rate unchanged at 3.75% in February, with a narrow 5 to 4 vote, as policymakers balanced easing inflation pressures against risks from a weakening economy. Four members supported a 25 basis point cut, highlighting growing divisions within the Monetary Policy Committee. Inflation remains above the 2% target but is expected to fall back to around that level from April due partly to energy price developments. Pay growth and services inflation have continued to ease, reflecting subdued economic growth and rising slack in the labour market. Policymakers noted that risks of persistent inflation have diminished, while weaker demand and a softening jobs market pose downside risks. Bank Rate has already been reduced by 150 basis points since August 2024, lowering policy restrictiveness. The committee signalled that further rate cuts are likely but will depend on incoming inflation data, with future decisions expected to be finely balanced.