As early as 2026, expectations for interest rate cuts were firmly planted Bank of EnglandWith debate centered on time and scale. This view changed after the outbreak of the Iran War.
Higher energy costs linked to the conflict have raised inflation expectations and added uncertainty to the economic outlook, prompting policymakers to reassess the path of rates. Markets have shifted from fears of cuts to expectations of long-term borrowing costs, which are likely to rise further if inflation persists.
At its March 19 meeting, the bank discussed rates with the governor Andrew Bailey Saying it was “ready” to respond to inflationary pressures. Other members of the Monetary Policy Committee indicated that rates could remain high for a long time, or rise if necessary.
This followed a sharp reaction to market expectations, with futures prices briefly rising several times this year and tapering off in subsequent weeks.
In that backdrop, attention turns to today’s decision. While a rate hike remains possible, expectations have largely stabilized, with policymakers likely to wait for clearer inflation data before taking further action.
The market expects the Bank’s Monetary Policy Committee to keep the base rate unchanged at 3.75% following Bailey’s recent signals that a hike is unlikely in the near term. However, after the unanimous decision to keep rates on hold last month, the vote may be more divided this time, reflecting rising inflation risks and stronger-than-expected business activity.
Nicholas Mendes, head of marketing at John Charcoal, commented: “A split vote looks likely, and in some ways the vote split could matter almost as much as the title decision.
“Markets are already pricing in a higher rate environment. Two, three and five-year SONIA swaps are all sitting around 4.18% to 4.21%, and the forward curve indicates that the 3-month SONIA is moving higher in the coming months rather than falling sharply. This suggests markets are not considering current rates as an endpoint.
“The question now is when a rise occurs, how high the Bank Rate ultimately needs to go, and how quickly the Bank feels the need to act.
“My view is that a hike this week should not be ruled out. If the MPC accepts that a rate rise is likely, there is a case for action now rather than waiting until the next meeting on June 18. Waiting for another seven weeks risks escalating inflation pressures and could increase the likelihood of a larger move being needed later.
“If the bank holds, borrowers should not read it as a clear signal that mortgage rates are about to fall. A hard hold, for example a 5-4 vote, would still be a hard hold. It would tell the market that the bank is only one vote away from raising rates, and that’s not the kind of backdrop that typically gives lenders the confidence to cut aggressively.”
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