The Bank of England is expected to keep interest rates unchanged at 3.75% this week and is planning to launch a "long-run energy shock" stress test to hedge risks.

Notice that the Bank of England is expected to conduct multiple stress tests this week to reveal how it may respond to ongoing energy price shocks, while holding off on taking immediate action on interest rates. The market generally predicts that the Monetary Policy Committee (MPC) will keep the borrowing cost at 3.75% on Thursday, waiting for further clarity on the Middle East conflict. However, with the Iran war entering its third month, committee members may innovate in their communication to demonstrate how they will deal with prolonged market turmoil. Officials believe that futures signals predicting a significant easing of energy price pressures due to the destruction of Middle Eastern infrastructure may be overly optimistic. While these pricing will support the Bank of England's core forecasts, banks may acknowledge the possibility of more negative outcomes, which could have a disruptive impact on economic growth and inflation. Energy futures prices have declined since their peak in March. Michael Saunders, senior adviser at the Oxford Economics Institute and former interest rate setter at the Bank of England, said, "They could come up with energy price scenarios, but they could also develop scenarios of different degrees of second-round effects for a given energy price trajectory." Due to the "wide range of possible outcomes," these scenarios will play a "core role" in their decision-making. Ongoing energy shocks could further impact job growth in the UK, but also increase the risk of an inflation feedback cycle - as workers may demand higher wage increases to compensate for losses, while struggling businesses may try to raise prices in response. Hawkish members of the Bank of England may emphasize the latter over the former, and recent data shows some recovery in economic activity this month. However, evidence of such effects is limited so far, as during times of job cuts and weak demand, both workers and companies lack bargaining power. The money market currently expects two 0.25 percentage point rate hikes this year, but many economists believe the Bank of England is more likely to keep its policy unchanged. Economists Dan Hanson and Matt Bonnie pointed out, "The Bank of England appears likely to hold rates steady in April, as it continues to assess the impact of energy shocks on the economy. It may maintain its 'prepared to act' guidance, with a few policymakers calling for preemptive rate hikes. While these votes could make headlines, we believe most will be cautious about raising rates in the face of weak demand. This is consistent with our view that rates will ultimately remain stable this year." Some analysts believe that the damage caused by the conflicts in the Persian Gulf in recent weeks will keep energy prices high, even if the US and Iran can reach a peaceful agreement and the Strait of Hormuz reopens to commercial shipping. Criticism has been directed at the Bank of England for failing to anticipate the scale and persistence of inflation due to energy shocks triggered by the Russia-Ukraine conflict. The bank has been trying to downplay its core inflation forecasts. Recent monetary policy reports have included alternative paths for inflation and rates, as part of a reform proposed by former Federal Reserve Chairman Ben Bernanke. Policy rules sourced from economic literature are used to show how rates may respond, and some of the nine MPC members have indicated which scenarios they believe are most likely to occur. The Bank of England will strive to avoid a repeat of the dramatic market reaction after the March meeting. Back then, investors rushed to bet on more rate hikes after the bank signaled readiness to act on inflation, causing a fluctuation of about 32 basis points in the two-year yield on the day of the announcement. Many market participants attributed this volatility to another innovation, where the bank released the views of each rate setter alongside the main statement. Bank of England Governor Andrew Bailey tried to reassure investors who had already priced in up to four rate hikes, insisting that he was not in a hurry to change policy. Thomas Pugh, Chief Economist at RSM UK, said, "The market's reaction last time was quite overblown. I wouldn't be surprised if, to avoid that reaction, this time there are some temporary and clearer content." Lawrence Mutkin, head of interest rate strategy for Europe, the Middle East, and Africa at Montreal Bank, said that while the Bank may rely on scenario analysis to address the huge uncertainty in energy prices, there may be a clearer common thread in individual statements. Mutkin said, "They may think they should show a more unified front again," adding, "You'll see more common wording in individual statements."