Bank of England: Shockflation fears prompt the Bank of England to press pause

The Monetary Policy Committee has voted unanimously to keep interest rates on hold.
Wariness has risen given the jump in oil and gas prices as the Iran war escalates.
Stagflation risks are bedding in, with the economy stagnating while price pressures rise.
Financial markets are pricing in a holding pattern ahead, with a potential increase in rates at the end of the year.
Susannah Streeter, Chief Investment Strategist, Wealth Club

Bank of England decision-makers have understandably turned super-wary as war rages in the Middle East, with an energy crisis mounting and inflationary pressures building sharply. Shockflation fears are rising as oil and gas prices escalate to scorching levels, which risk spilling over into broad price rises across the economy. They are now forecasting that the headline rate of inflation will rise to 3½ % in March, almost half a percentage point higher than expected in the February Report. So, they feel they have little choice but to sit on their hands, watching and waiting to see how the conflict evolves.

They are also having to grapple with an economy which has ground to a halt and risks going into reverse as consumers and companies batten down the hatches and become cautious about spending. Cooling wage growth in the latest jobs data reflects a weakening labour market. Ordinarily, that would have nudged the committee into agreeing a cut to interest rates, but they are hamstrung by international events.

However, interest rate policy is a blunt tool. This is an imported inflation crisis, and keeping rates higher to try to dampen domestic demand will hurt the whole economy. Only a resolution to the conflict will tackle the root cause. But with no end in sight, households and businesses will be bracing for a big jolt of financial pain.”