Bank of England Holds Interest Rates at 3.75%

Monetary Policy Summary (March 2026)

Bank Rate: 3.75% pa (unchanged, unanimous vote)

Following the Federal Reserve's decision to hold interest rates within a range of 3.5% to 3.75% pa yesterday, the Bank of England followed suit today and we expect the European Central Bank (ECB) to hold as well at 2.0% pa when it reports in around an hour at 14:15 CET (Central European Time), 13.15 GMT.

Key Drivers of the Decision

Middle East Conflict

• Conflict involving Israel, the United States, and Iran.
• Attacks on energy infrastructure and disruption to Strait of Hormuz shipping.
• Significant rise in oil, gas, and other commodity prices.

Energy Price Shock

• Oil prices up ~60% since February.
• European gas prices up ~60%.
• UK gas futures up 35–40%, affecting the July–September Ofgem price cap.

Market Conditions

• Higher volatility and weaker risk sentiment.
• Equity prices down across advanced economies.
• Corporate bond spreads wider.
• Market‑implied path for Bank Rate shifted upward for 2026.

Inflation Outlook

Near‑Term

• CPI inflation expected to rise due to higher energy and commodity prices.

Medium‑Term

• MPC focused on preventing second‑round effects in wages and prices.
• Weaker economic activity from higher energy costs may dampen inflation later.

Policy Objective

• Ensure inflation returns to the 2% target sustainably.
• MPC stands ready to act if domestic inflation pressures increase.

Global Economic & Financial Conditions

Energy Supply Disruption

• Strait of Hormuz shipping “almost ground to a halt”.
• IEA strategic oil reserve release will only partially offset supply losses.
• Recovery of supply expected to take time even if conflict ends.

Commodity Markets

• Upward pressure on:
  • Oil
  • Gas
  • Fertiliser
  • Neon gas
• Options markets show increased upside risk to energy prices.

Financial Markets

• Higher volatility.
• USD stronger; sterling broadly unchanged.
• Market participants expect no immediate rate change, but see higher risk of future tightening.

US Trade Policy Update

• US Supreme Court ruling led to a temporary 10% uniform tariff on all trade partners.
• Direct UK impact is small, but policy uncertainty has increased.

MPC Forward Guidance

• Monitoring Middle East developments closely.
• Watching for:
  • Domestic inflation persistence
  • Wage‑price feedback loops
  • Impact of higher energy costs on demand
• Prepared to adjust policy to keep inflation on track for 2%.

FAQs

Why did the MPC keep Bank Rate at 3.75%?

Because the inflation shock came from global energy prices, which monetary policy cannot directly influence. The MPC is assessing the balance between higher near‑term inflation and weaker demand.

Will inflation rise again?

Yes. Higher oil and gas prices will push CPI inflation up in the short term.

Is the MPC worried about wage‑price spirals?

Yes. The MPC highlighted second‑round effects as a key risk, especially if energy prices stay elevated.

How severe is the energy supply disruption?

Significant. Shipping through the Strait of Hormuz has nearly stopped, affecting around 20% of global oil and LNG flows.

Are energy prices expected to stay high?

Markets expect the conflict to be short‑lived, but risks are skewed to the upside due to:

• Slow recovery of supply
• Stock rebuilding
• Increased awareness of global energy vulnerabilities

How have financial markets reacted?

• Equity prices fell.
• Bond spreads widened.
• Market‑implied interest rate paths shifted upward.

What does the MPC plan to do next?

Remain vigilant and act if domestic inflation pressures rise, ensuring inflation returns to 2% sustainably.