UK Interest Rate Held at 3.75%

The Bank of England today held the UK Base Rate at 3.75%. The vote of the nine person Monetary Policy Committee was unanimous, the vote was expected to be 7-2. In a rare disclosure the two members expected to vote for a cut openly said that they changed their mind because of the US-Iran war.

There is further information on this at https://www.bbc.co.uk/news/live/cm2r295p8p9t whose chart we have used.

Governor Andrew Bailey expanded on the theme talking about a “significant increase” in global energy prices, and “second-round effects” on inflation as businesses increased their prices because their energy and transport fuel costs. He said the only solution was resolution of shipping through the Straits of Hormuz.

The Bank said the “new shock to the economy” would likely raise inflation to 3.5% in March, and it could get as high as 3.75% before falling again. Before the war, inflation was expected to fall from its current 3% to hit the Bank’s 2% target this year.

The committee had even discussed raising rates, but Bailey importantly suggested markets were “getting ahead of themselves” if they assumed multiple rises this year. “Today we’ve given a very clear message. The right place to be is on hold.” he said.

Europe and Japan also held rates today, as diid the US Federal Reserve yesterday, largely with similar sentiment.

Markets had already moved substantially following the bombing of oil facilities in Qatar yesterday, with the FTSE 100 and 250 indices down over 3%. There was a further small dip on the rate announcement but this quickly recovered. The pound rose against the dollar by 0.45%, but only to restore the drop yesterday when the dollar rate decision was issued.

The MHW View

Clearly this is a difficult time, and it is disappointing that the March rate cut we expected last month did not happen, and indeed the whole trajectory for further rate cuts is on hold until there is some resolution in the Middle East.

Nevertheless, investments recovered after the Ukraine shock in 2022, and history shows that they should recover again. The UK stock market is down 8% in two weeks, but is still up for 2026, and we are only 12 weeks into the year. Governments (including the US) are very sensitive to oil prices and we can expect this part of the wider conflict to be foremost in their minds.

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