Bank of England Holds Rates Amidst Middle East Uncertainty, Global Central Banks Wary
LONDON – The Bank of England on Thursday unanimously decided to hold its benchmark interest rate steady at 3.75%, a move largely attributed to escalating tensions in the Middle East and the resulting surge in global energy prices. The decision marks a significant shift from earlier expectations of a rate cut in March.
Prior to the outbreak of conflict in late February, the Bank of England had signaled a potential easing of monetary policy. However, the current geopolitical climate has injected considerable uncertainty into the economic outlook, particularly regarding inflation and growth.
“Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs,” the Bank of England stated.
The central bank acknowledged a period of disinflation in domestic prices and wages prior to the recent crisis, but warned that consumer price index (CPI) inflation is now expected to rise in the near term due to the “shock to the economy.” Policymakers are also monitoring the risk of increased domestic inflationary pressures stemming from wage and price-setting, particularly if elevated energy prices persist.
The decision sent ripples through financial markets. London’s FTSE 100 extended its losses, falling 2.5% by midday. Yields on 10-year gilts rose 14 basis points to 4.874%, while the 2-year gilt yield increased by 20 basis points to 4.31%.
“Most central banks are facing the same challenging backdrop, but the trade-offs are not equal,” noted Madison Faller, Global Investment Strategist at J.P. Morgan Private Bank. “The Bank of England’s are uniquely British: stubborn inflation, a weakening jobs market, and little fiscal wiggle room.” Faller added that market expectations have shifted dramatically, from anticipating two rate cuts just weeks ago to bracing for as many as two rate hikes this year.
Global Central Banks Respond to Shifting Landscape
The Bank of England’s move is part of a broader trend among global central banks reassessing their monetary policies in light of the Middle East conflict.
The Swiss National Bank also held its main policy rate at 0.00% on Thursday, but indicated an increased willingness to intervene in foreign exchange markets to counter any “rapid and excessive appreciation of the Swiss franc.” SNB Chairman Martin Schlegel emphasized that any intervention would be motivated by monetary policy considerations, not competitive advantage for Swiss exporters. He noted the impact on the Swiss economy would depend on the duration of the conflict and sustained high energy prices.
Sweden’s Riksbank similarly maintained its main policy rate at 1.75%, stating it expects the rate to remain at that level “for some time to come,” while remaining vigilant to the evolving situation. The Riksbank anticipates the war in the Middle East will dampen growth and contribute to higher energy prices.
The European Central Bank (ECB) was not expected to alter its benchmark interest rate before the conflict, with Eurozone inflation already near the central bank’s 2% target. February data showed inflation in the Eurozone rising to 1.9%, up from 1.7% in January. ECB President Christine Lagarde had previously described the Eurozone’s economic outlook as “in a good place,” a sentiment now tempered by the unfolding geopolitical events. Traders are closely watching for guidance from the ECB on how it might respond to rising energy costs and inflationary pressures.