Expected chaos! Economists bet that the Bank of England will stand still this year, while traders are gambling on a rate hike before September. The April interest rate decision will be a critical test.

A recent survey of economists shows that despite the energy shock caused by the Middle East conflict leading to an increase in inflation, the Bank of England is expected to maintain interest rates unchanged throughout 2026. The survey indicates that economists have raised their inflation expectations for each quarter of 2026 and expect the inflation rate to peak at 3.3% in the second half of the year. Nevertheless, economists anticipate that the Bank of England is likely to maintain the benchmark interest rate at 3.75% until the first quarter of 2027 and make two 25 basis points rate cuts later next year. These survey results diverge significantly from market pricing. Traders currently expect the Bank of England to raise interest rates by 25 basis points before September and anticipate a 45% chance of another rate hike by the end of the year. Prior to the outbreak of the Middle East conflict, the market had been expecting rate cuts from the Bank of England this year. Sanjay Raja, chief UK economist at Deutsche Bank, stated, "Looking ahead, we expect UK economic growth to moderate. While some of the downside risks to the economic outlook have eased, we still believe that the risks to economic activity remain biased to the downside relative to our core forecast." Weakening economic growth outlook Under the drag of soaring energy costs, the outlook for UK economic growth has weakened. The survey conducted between April 9 and 15 shows that economists expect the UK economy to grow by 0.7% in 2026 and by 1.2% in 2027. Both figures are lower than previous forecasts. The International Monetary Fund (IMF) also recently downgraded its expectations for UK economic growth. The IMF stated that the UK economy is expected to grow by only 0.8% in 2026, significantly lower than the previous forecast of 1.3%. The magnitude of the IMF's downward revision of its UK economic growth expectations is the largest among major advanced economies, reflecting the high cost that the UK has paid due to the inflationary impact of the Middle East conflict. IMF Chief Economist Pierre-Olivier Gourinchas attributed the downward revision of UK economic growth expectations to three main factors: dependence on natural gas imports, lack of storage facilities, and the economic growth slowdown that occurred at the end of last year following Chancellor Rishi Sunak's implementation of a 300 billion tax hike plan. Gourinchas stated that the UK's energy structure is highly dependent on natural gas - the conflict in the Middle East has caused the price of natural gas that the UK heavily relies on to double. While much of the natural gas is produced domestically in the UK, a portion still needs to be imported, and imported natural gas is significantly more costly based on market prices. Experts have warned that gas and electricity costs for UK households are expected to rise by nearly 20% this summer, leading to an average bill approaching 2,000 in July. In addition to the IMF's downward revision of UK economic growth expectations, recent data also reflects the dim prospects for UK economic growth. The UK's CIPS Global Purchasing Managers' Index (PMI) fell to a six-month low of 50.3 in March, significantly below the previous reading of 53.7 and well below the earlier estimate of 51 - although the index still remains above the 50 threshold, theoretically representing economic expansion, the actual reading has signaled a slowdown. Furthermore, a quarterly survey of UK chief financial officers conducted by one of the world's four major international accounting firms, Deloitte, showed a sharp drop in the net confidence index from -13% at the end of 2025 to -57% in the second half of March, hitting the lowest level since the first quarter of 2020 when the COVID-19 pandemic broke out. Additionally, UK businesses' expectations for inflation a year ahead have risen to 3.6%, reaching the highest level since the third quarter of 2023. It is understood that Sunak previously viewed Deloitte's CFO survey report as an important indicator of UK business sentiment. Deloitte stated that with the significant rise in global energy prices caused by the deteriorating geopolitical situation in the Middle East, signs of global stagflation are becoming increasingly apparent, and global businesses are rapidly moving towards cost-cutting mode at the expense of recruitment, discretionary spending, and long-term investment plans. Deloitte added that the survey showed that 61% of CFOs are very concerned about the rise in energy prices, inflation, and potential stagflation leading to rising interest rates. Ian Stewart, Deloitte's chief economist in the UK, said, "In the past 16 years, UK CFOs have rarely focused so much on cost control and conservative measures to preserve cash as they do today." Deloitte found that 79% of CFOs surveyed expect a significant decrease in recruitment over the next 12 months, the highest proportion since the second quarter of 2020 and significantly higher than 55% at the end of last year. Expectations cool for Bank of England rate hikes While the surge in energy costs has also heightened the risk of rising inflation in the UK, market expectations for rate hikes by the Bank of England this year have cooled given the weakening economic growth outlook and signs of easing tensions in the Middle East in recent times. The survey results mentioned above also align with recent statements from Bank of England Governor Andrew Bailey. Bailey stated in an interview that faced with the energy price shock triggered by the Middle East conflict, the Bank of England will not make hasty decisions on raising interest rates. Bailey explicitly pointed out in the interview that the rise in oil and gas prices would "undoubtedly" transmit to overall price levels, but due to the intertwining of multiple uncertainties, making decisions on interest rates at present has become "very, very difficult." Bailey further explained, "There are indeed some very tough judgments to be made, and we will not rush to conclusions on these issues, as there is a great deal of uncertainty - not only about how things will evolve, but also about how these changes will transmit and affect the UK economy." Market analysts have pointed out that Bailey's recent statements are aimed at dampening the market's expectations for aggressive rate hikes. When the Bank of England decided to keep rates unchanged in March this year, Bailey had already warned that market expectations for future rate hikes were "excessive" and "too forward-looking." Bruna Skarica, chief UK economist at Morgan Stanley, stated in a report that the Bank of England may keep rates unchanged at 3.75% in the coming months, rather than hiking them. Skarica said that while the Middle East conflict has increased inflation risks in the UK, a weak job market could limit the rise in inflation. She added that if global energy supplies return to normal levels, the Bank of England could potentially signal a rate cut as early as the fourth quarter of 2026. Callum Picklin, senior economist at Peel Hunt, also stated that although there are concerns about inflation, the likelihood of the Bank of England hiking rates in 2026 has decreased. He pointed out that market expectations for the Bank of England to start a rate hike cycle in 2026 are facing logic correction, with the direction of the Middle East conflict essentially replacing domestic economic data as the determining variable for the short-term interest rate path. Peel Hunt's base expectation is that the situation in the Middle East is likely to calm down quickly, the Strait of Hormuz will reopen for navigation, and external shocks to energy prices are expected to dissipate. Once the situation cools down, the pricing logic will quickly shift from "preventing runaway inflation" to "rescuing the economic downturn", freeing up space for the Bank of England to cut rates within this year. However, Picklin also added that if the Middle East conflict persists, the Bank of England may be forced to take aggressive action to boost confidence and stabilize inflation expectations. Bank of England April 30th rate decision as a key test The Bank of England's next rate decision meeting is scheduled for April 30th. At that time, Bailey and his colleagues at the central bank will have to provide a clear policy response to the complex macroeconomic situation. Analysts generally believe that if geopolitical tensions do not escalate further and oil prices ease in the next two weeks, the Bank of England is likely to choose to maintain the current interest rate level unchanged and retain flexibility for future actions in the meeting statement. However, if there are signs of inflation expectations unanchoring, a "defensive" mild rate hike is not entirely impossible. UK Chancellor Rishi Sunak plans to announce a new plan later this week to help businesses cope with the high energy costs. Timely fiscal measures may mitigate the pressure on the Bank of England to tighten monetary policy in the short term.