Iran War Puts Bank of England in Holding Pattern

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(Bloomberg) — The Bank of England is set to skip an interest-rate cut that markets once saw as a near certainty, as officials pause to assess the disruption unleashed by conflict in the Middle East. 

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Investors and economists expect the Monetary Policy Committee to leave the benchmark rate on hold at 3.75% on Thursday, after US and Israeli attacks on Iran threatened to derail progress in steering inflation back down toward its 2% target.

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Markets now see a hike as the next most likely change by the UK central bank — a complete reversal to before the war, when traders put the odds of a move this week at around 80%.

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While recent meetings have been marked by knife-edge splits among the voting committee, this time economists are expecting a strong consensus in favor of leaving rates unchanged.

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Domestic data indicates a weak labor market, tepid economic growth and easing inflation expectations — at least before the war — all factors that support the case for more easing. However, the recent turmoil in energy markets is likely to instill caution at the BOE after it was criticized for being too slow to contain the surge in prices that followed Russia’s invasion of Ukraine in 2022.

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Furthermore, jobs data came in stronger than expected on Thursday morning, with unemployment holding steady and employers adding tens of thousands of workers to their payrolls in December, January and February.

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The BOE vote follows the US Federal Reserve’s decision on Wednesday to hold rates while it considers the effects of sharply higher energy prices. The ECB will then follow this afternoon.

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Vote Split

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While Governor Andrew Bailey has cast the deciding vote during the past three meetings, a majority of respondents to a Bloomberg survey expect to see a seven-to-two majority in favor of no change in policy. 

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Instead of the 2022 precedent, some economists have argued that the current backdrop is more akin to 2011 when rate-setters looked past a rise in energy costs that drove inflation above 5%. The BOE is facing a subdued jobs market that could contain the second-round inflation effects from another oil and gas price surge, as it did sixteen years ago.

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Long-standing doves Swati Dhingra and Alan Taylor are seen as the most likely to keep backing lower interest rates. But some of the economists surveyed expect a tight vote-split to continue, after deputy governors Sarah Breeden and Dave Ramsden supported looser policy in February.

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Guidance

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The MPC may decide to rip up their February guidance that steered markets toward more rate cuts.

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Against a calmer economic backdrop, it told investors last month that bank rate was “likely to be reduced further” but stressed the scale and timing of any move depended on inflation.