Chances of Interest Rate Cut on 19 March Slashed

The Bank of England is due to make its next decision on interest rates on 19 March as is the ECB (and the day before for the Federal Reserve).

90% Chance of Rate Cuts

With inflation falling and ‘swap rates’ decreasing (the fixed rate portion of a derivative that lenders buy to hedge against future interest rate fluctuations), the expectation 2 weeks ago was around a 90% chance of interest rates being cut with 2 year swap rates at over 4% a year ago and down to around 3.35% 2 weeks ago.

Israel, US and Iran

Last weekend military action started in Iran by Israel and US.  Oil prices are already rising, the Straights of Hormuz (where 20% of the worlds oil supplies pass though) is virtually shut, as well as attacks on Iranian refineries in addition attacks on surrounding country oil fields (by Iran) are prompting fears of oil production disruption or even shutdown in UAE and Saudi Arabia.  This has pushed oil prices up, which in turn will push all costs up due to transportation of goods and services.

Inflation was going down but is it on its way back up again?  Certainly, the expected interest rate cuts may not happen.

30% Chance of Rate Cut

On Thursday, 2-year swap rates were back over 3.6% (highest since October 2024) and as a result, lenders are now pushing fixed rate mortgages back up.  With swap rates up, it tells us that the market is pricing in a 25%-30% chance now for a 19^th March interest rate cut.

Comment

A 90% chance of rate cuts falling to just a 30% is a huge move in just over a week.  On a positive note, governments will benefit from higher inflation as it devalues record national debt, which is perhaps what is needed in the longer term, although it does not help buyers on to the property ladder.