As the Bank of England’s MPC prepares to deliver its latest interest rate decision tomorrow, the path for UK monetary policy has become markedly more complex. What only weeks ago looked like a steady progression toward rate cuts has been disrupted by a renewed surge in geopolitical risk, with the escalating conflict in the Middle East driving volatility in oil prices and, in turn, inflation expectations.
For policymakers, the challenge is no longer simply about calibrating the pace of easing, but about preserving credibility in the face of another externally driven inflation shock. Memories of the policy missteps during the Russia-Ukraine war still loom large, leaving central banks wary of acting too quickly, or having to reverse course.
Against this backdrop, a clear consensus has emerged among leading economists and investment strategists: a near-term pause by the MPC is the most likely outcome. Yet beneath that agreement lies a wide spectrum of views on what comes next, from delayed rate cuts to the re-emergence of stagflation risks and even the possibility of renewed tightening.
You can follow all the latest news and views on the Bank of England’s decision from 12 midday tomorrow, 19th March, here on WealthDFM, plus later tonight we will be updating readers on that all important Fed decision too.
Below, industry experts assess how shifting inflation dynamics, fragile growth, and heightened geopolitical uncertainty are reshaping the outlook for interest rates here in the UK and what it means for investors and for asset allocation strategies in the months ahead.
Central banks prioritise credibility over speed
With oil driven inflation volatility, both BoE and Fed are likely to prioritise credibility over speed, says John Wyn Evans, Head of Market Analysis at Rathbones, as he comments:
“As the conflict in Iran enters its third week, markets are showing a surface calm that belies the scale of the risks. Equity indices have softened but remain far from disorderly, helped in part by the flush out of speculative positioning in week one. Yet no central banker will be reassured by this apparent resilience. Energy driven inflation shocks are notoriously difficult to ‘look through’, and both the Bank of England and the Federal Reserve will be acutely aware of how quickly a temporary spike can become entrenched.
“The early days of the Russia-Ukraine war still casts a long shadow. Then, policymakers underestimated the persistence of inflation and found themselves forced into a more aggressive tightening cycle than intended. The Bank is determined not to repeat that mistake. Inflation expectations have nudged higher, oil volatility is clouding the incoming data, and sterling has slipped as the dollar gains from the US’s advantageous terms of trade as a net energy exporter.
“Investors, too, carry the scars of 2022, when equities and bonds fell simultaneously. Some will worry we are heading for a repeat. I’d temper those concerns. Rates and yields are already far higher than they were in early 2022, making another dramatic reset in the price of money less likely. And whereas inflation then was fuelled by both excess demand and disrupted supply, today’s pressures are almost entirely supply driven.
“Higher energy prices are more likely to divert spending away from discretionary categories and suppress activity elsewhere rather than ignite a demand boom. That argues for central banks postponing cuts they had expected to deliver — not preparing to re tighten policy. Even so, the substantial tail risk of a longer energy supply constraint and further upward inflationary pressures means that we remain reluctant to venture too far down the duration curve in terms of fixed income allocations.
“Across the Atlantic, the Fed faces a similar dilemma. Cuts have been pushed further out, with some pricing drifting into 2027, and financial conditions have quietly tightened. But the US enters this period with comparatively stronger economic momentum and a currency strengthened by terms of trade dynamics. Even so, Chair Kevin Warsh’s arrival brings uncertainties of its own — supportive of lower rates in principle, but also keen to shrink the Fed’s balance sheet, a shift that could unsettle liquidity conditions.
“Against this backdrop, the Bank of England is unlikely to surprise this week. Rate cuts once seen as plausible for spring have been fully priced out, and a rise later in the year can’t be dismissed. With the duration of the conflict unclear, the most probable outcome is a holding pattern: not tightening, but certainly not loosening until the fog lifts.”
Peder Beck-Friis, Economist at PIMCO believes that the Bank of England is widely expected to keep rates on hold given recent events.
Beck-Friis comments: “We expect them to stay in a wait-and-see mode for the next few meetings. The outlook is highly uncertain and depends on the path of energy prices. If prices stay where they are, the inflation impact could be around 1 percentage point, leaving headline inflation close to 3% by year end. If prices follow forwards, however, the effect would be smaller.
“We do not expect significant second-round inflation effects from higher energy prices. This is a very different situation from 2022, when the labour market was tight and the shock followed many years of fiscal easing.
“We ultimately think the BOE will look through this inflation shock and continue cutting rates over time. But the timing has become more uncertain, and it’s possible the BOE delays cuts until late this year or even next. In any case, we see the bar for hiking rates as high.”
On what the current market environment means for investments, Charlie Ambler, Co-Chief Investment Officer, Partner at wealth management firm Saltus, said:
“As the conflict in the Middle East continues to escalate, increased oil prices are poised to push up the headline rate of inflation to near double the Bank of England’s 2% target. This is a direct threat to the Bank’s slow and steady rate cutting cycle, with markets now increasingly pricing in a change of course.
“The consensus is that rates will be held at 3.75% this week, with hikes later this year now being priced in by the market. However, this depends entirely on how long the conflict goes on and oil prices remain elevated. While markets will be looking for reassurance amid this uncertain backdrop, any forward guidance will likely remain cautious.
“The risk of renewed pressure later in 2026 is now front of mind for investors. With both the FTSE 100 and S&P 500 falling sharply over recent days, bond yields rising and ongoing gold price volatility, geopolitics continues to shape asset allocation decisions. However, as long term returns are driven by maintaining diversified exposure to quality assets, the focus should remain firmly on quality and resilience, underpinned by a disciplined approach portfolio construction.”
War-related uncertainty points to a unanimous hold
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, said:
“The Bank of England will almost certainly keep the UK base rate on hold at 3.75% at the next Monetary Policy Committee (MPC) meeting’s conclusion at noon on Thursday. Geopolitical uncertainty makes forecasting difficult and for that reason the decision to hold will likely be unanimous.
“Immediately prior to the onset of hostilities in and around the Persian Gulf, a seventh rate cut in the current cycle looked a certainty. Indeed, Bank Governor Mr Andrew Bailey noted in his 5th February post-meeting press conference that a 3.25% rate represented a “reasonable market curve”, a clear indication that further policy easing was, at that point, in the pipeline.
“Unsurprisingly, the war in the Middle East changes all that. Higher energy prices, if sustained, will result in higher headline inflation. The question asked prior to the meeting’s commencement is whether the conflict might delay anticipated rate cuts, prevent them indefinitely, or even cause them to be reversed. Fast-moving developments have resulted in skittish financial markets are edging to the latter position, but not imminently.
“As ever, senior Bank officials have a tightrope to walk. While sustained high energy prices would cause price pressures to rise, the UK economy has continued to struggle at the outset of the year and hardly needs a policy tightening which might only serve further to limit any revival down the road.
“Fortunately, the next MPC meeting is not scheduled until the very end of April, providing time for a negotiated ceasefire or alternatively, more economic data points on which to base a more considered decision. Senior officials will likely take the view that the most prudent course of action, for now, is to maintain the status quo as the ongoing conflict unfolds.”
Stagflation risks re-emerge
The stagflation trap is on the radar of Kevin Thozet, a member of the investment committee at Carmignac, as he explains:
“With the Bank of England (BoE) expected to leave policy rates unchanged, the key question becomes whether it will stick to the dovish tone adopted since the beginning of the year. The UK economy had moved into a difficult configuration of elevated inflation and steadily weakening growth, but with higher oil and gas prices and rocketing inflation expectations, the Bank could pivot to a more hawkish stance.
“Recent economic data confirm the economic slowdown is becoming more pronounced. Wages are decelerating and labour market momentum is poor; the past 15 readings showing only four months of job creation. Consumer demand remains fragile as well, with retail sales volumes barely above Covid levels. At the same time, capital expenditure has fallen sharply, reflecting weak corporate confidence. Unsurprisingly, growth indicators remain subdued, with recent GDP data pointing to essentially zero growth.
“In normal circumstances, such an economic backdrop would make a strong case for rate cuts. Yet the BoE faces a familiar constraint: inflation remains too high.
“The challenge has now intensified with the third Gulf War triggering a new external inflation shock. The UK is particularly exposed to energy price movements, given the role of oil and gas in its energy mix with price increases feeding directly into domestic inflation dynamics.
Financial markets have reacted forcefully. Among developed economies, the UK has seen the sharpest repricing in inflation expectations, with two-year breakevens rising roughly 140 bps and one-year breakevens jumping by a staggering 180 bps to nearly 4.5%. Government bond yields have also climbed more sharply in the UK than anywhere in the developed world.
“This rise in yields is weighing on financial conditions. Higher rates are already putting pressure on equity markets, and the macro outlook provides little support. Unlike the US or euro area – where growth is expected to reaccelerate in 2026 – the UK economy is projected to slow further this year relative to 2025.
“Even if cuts are on pause, a new tightening cycle seems unlikely in the short term. The UK remains the only G10 economy currently experiencing a clear deceleration in activity.
“Nevertheless, markets have repriced aggressively. Earlier this year, investors expected two rate cuts in 2026, and now it’s one hike.
“While this might appear to justify a more bullish stance on gilts, similar repricings toward tighter policy have occurred across many developed markets which have less of an inflation problem and as such, appear more attractive.
“From a currency perspective, the balance of risks may still point to a lower GBP. If the BoE were eventually forced to cut rates in response to deteriorating growth, sterling would likely weaken along with money market yields. And if the central bank keeps policy unchanged or moves to hiking, continued or more acute economic softness suggest downside pressure on the currency.”
Ajith Nair, CIO of Isio Investment Management said: “Expectations for UK interest rates have shifted materially in recent weeks, with markets now anticipating that the Bank of England will hold rates in March, keeping rates at 3.75%, despite previously pricing in a cut. The primary driver has been the rise in oil and gas prices linked to the Iran conflict, which has pushed inflation risks higher. This creates a difficult backdrop for both policymakers and investors. In fixed income markets, UK government bonds have already come under pressure at times, with yields rising as rate‑cut expectations have been pared back and, more recently, partly restored. Shorter‑dated bonds are now reflecting a more uncertain path for policy rather than a straightforward easing cycle.
“From an equity perspective, while markets may ultimately recover once geopolitical tensions ease, the near‑term outlook is likely to remain volatile. In this environment, maintaining diversification and avoiding reactive positioning is key, particularly as mixed signals on inflation and growth continue to weigh on sentiment.”
Patrick O’Donnell, Chief Investment Strategist, Omnis Investments has his eye on the bond markets as he comments: “Considering the current environment, it’s highly likely the Bank of England will hold interest rates – a scenario which would have been thought unlikely just three weeks ago. Amid the uncertainty of how long the current energy supply shock will last, and therefore how high inflation could go and for how long, the Bank of England will want to play for time and keep its options open. Considering its loss of credibility during the last energy shock in 2022, we should expect a more cautious approach from the Bank of England in 2026, favouring holds and delaying cuts to avoid embarrassing backtracking with hikes at all costs.
“However, it should also be noted that the economy looks very different today than in 2022. Our view is the recent market reaction is reasonable and there will be a more pronounced downward impact on economic activity. But we’re wary of the journey that markets, and in particular the bond market, may go on in the meantime, and are not looking to add to our current interest rate/bond exposure in the UK right now.”
Axel Rudolph, Senior Technical Analyst at investing and trading platform IGMarkets reminds us that it’s uncertainty prevailing again right now as he comments: “Markets are increasingly pricing in a prolonged period of higher rates, with expectations that the Bank of England will hold at 3.75% as policymakers grapple with the inflationary impact of the Iran conflict. The shift in sentiment has been swift, with rate cuts now largely off the table and investors beginning to contemplate the possibility of tightening later in the year. For now, uncertainty reigns, but the balance of risks has clearly tilted away from easing and towards a more hawkish outlook.”
Chris Cheverall, Head of UK, CMC Markets said: “The Bank of England, which is set to meet and vote on whether to cut interest rates from 3.75% later this week, is unlikely to make the cut that was widely expected when the Chancellor delivered the Spring Statement. Before the outbreak of the war, inflation was expected to fall closer to the 2% CPI target; however, it is now likely to rise to 3% if gas and oil prices remain at current levels.
“Higher interest rates are detrimental to economic growth, increasing borrowing costs and encouraging people to save rather than spend. This leads to higher prices and reduced consumer spending, as people have less money to spend. As a result, we may see economic growth fall short of the government’s target.
“If the conflict continues, inflation will likely rise along with the cost of food and energy, calling into question whether the Chancellor’s economic plan is working. It is difficult to predict how severe the rise in inflation will be.”
Pointing to some potential silver lining, Cheverall continues,“Higher interest rates could benefit savers in the short-term, as they will receive a larger return on any savings or fixed-income investments that they have.
“For new and existing investors alike, diversification of assets and sectors is key. Always avoid overcommitting your assets to a single industry or company, which will leave you exposed to future market shocks.”
