UK interest rates could fall to 3.5 per cent by summer despite oil surge

The Bank of England will cut interest rates to 3.50 per cent either in April or June, according to economists polled by Reuters who have largely abandoned calls for a March 19 reduction as soaring energy prices driven by the Iran war ​raise inflation risks.

Conviction on the outlook has faded, with several economists unwilling to specify at which of the two meetings next ‌quarter the BoE will cut. Some simply delayed previous expectations of a series of cuts and others have wiped out expectations for any further easing.

There is no longer a majority view for where rates will end this year, although the median forecast from a Reuters poll taken this week still puts Bank Rate at 3.25 per cent by year-end.

Benchmark British government ​bond yields have risen around half a percentage point since the war started, while interest rate futures contracts are no longer pricing any ​cuts this year compared with a 90 per cent chance of a March reduction less than two weeks ago.

The Middle East conflict ⁠has upended many economists’ near-term expectations for inflation, which slowed to 3.0 per cent in January and previously was expected to drift down toward the BoE’s 2 per cent target ​in coming months. Brent crude oil prices are back above $100, after nearly touching $120 earlier this week.

Over 85 per cent of economists, 43 of 50, expected the BoE to ​keep Bank Rate (GBBOEI=ECI) unchanged at 3.75 per cent on March 19, a reversal from 65 per cent who expected a March cut in a February poll. Seven forecast a cut to 3.50 per cent.

About 60 per cent of economists, 26 of 43, expect the first cut this year next quarter. Among them, only around 40 per cent specified April’s meeting, when the BoE releases its next set of quarterly forecasts.

In ​the February poll, all but one economist expected Bank Rate to fall at least 25 basis points by mid-year.

“Given the situation we’re seeing with oil ​prices, we now think it’s more likely than not they will delay the next rate cut until April, but overall, we’re still looking for two cuts from the ‌Bank of ⁠England this year,” said Dean Turner, an economist at UBS.

“I suspect the bias in the minutes will still point to the need for further easing in due course…I don’t think there’s any doubt rates are going to fall, it’s just by how much and when.”

But in the three meetings before the war began on February 28, decisions by the Monetary Policy Committee were narrowly split.

Market forecasters appear to be increasingly split on their views too.

WEAKENING JOBS MARKET

“If you ​alternatively believe the BoE will continue easing ​without a clear and credible ⁠path back to the 2 per cent target, you are overlooking their repeated warnings about inflation persistence and their heightened sensitivity after five years of above-target outcomes,” said Stefan Koopman, senior macro strategist at Rabobank.

Last week Rabobank removed its forecast for ​two rate cuts this year to none.

Still, median forecasts from the March 9-12 poll showed rates at 3.25 per cent ​by end September, unchanged ⁠from the previous survey. Of the 46 economists who provided forecasts, 23 see rates at 3.25 per cent, 13 at 3.50 per cent, nine at 3.75 per cent, and one at 3.00 per cent.

One reason many are sticking to their forecasts for easing this year is a weakening job market. Unemployment in the final three months of 2025 rose to its highest in ⁠more than ​a decade outside the pandemic.

Overall inflation forecasts were largely unchanged from February’s poll, suggesting most ​economists expect the recent spike in oil prices won’t last.

Inflation was expected to average 3.0 per cent this quarter and 2.4 per cent next, above the BoE’s Monetary Policy Report projections.

Economic growth was forecast to average ​1.0 per cent in 2026 and 1.4 per cent in 2027.