The Bank of England cautiously "pauses hawkishness": while a rare internal model warns of a rate hike of 150 basis points, the governor soothes the market.

The Monetary Policy Committee (MPC) of the Bank of England voted overwhelmingly by a margin of 8 to 1 to keep the benchmark interest rate unchanged at 3.75%. The only dissenting vote came from the committee's acknowledged hawk, Chief Economist Hugh Pill, who advocated for an immediate rate hike. Against the backdrop of the ongoing Iran conflict and the jittery global energy market, the Bank of England chose to keep the benchmark interest rate unchanged in its April rate decision, but there were underlying tensions within the committee. The 8-1 vote ratio masked the rapidly spreading hawkish tendencies within the committee. The meeting minutes made it clear that several members who supported keeping the rate unchanged indicated that they "might consider raising rates at future meetings", and the threshold for joining Pill's camp was lowering. Deputy Governor Dave Ramsden and Clare Lombardelli, as well as external members Megan Greene and Catherine Mann, expressed similar views, warning that if energy prices fail to quickly fall, the financial environment "might need to tighten". Bank of England Governor's Remarks However, Bank of England Governor Andrew Bailey, at a press conference following the meeting, tried to balance the weak economy with severe inflation prospects. He stated that given the current weakness in the UK economy, the decision to keep rates unchanged was "reasonable". Bailey stated on Thursday that in some of the milder scenarios of the economic impact of the Iran conflict that the Bank of England considered, there might not be a need to hike rates to control inflation. But he then issued a clear warning: "If energy supply continues to be severely disrupted, rates may need to be raised." He said at the press conference on Thursday: "We did not suggest that rates would rise." This meeting revealed a Monetary Policy Committee that is at a crossroads and ready to restart rate hikes. With oil prices nearing the psychological threshold of $130 per barrel, the Bank's concerns about the economic outlook are shifting from mere inflation to the more challenging quagmire of "stagflation". After the decision was announced, financial markets initially reacted positively to the decision to keep rates unchanged. UK government bond prices continued to rise, and the yield on the two-year government bonds, which is most sensitive to policy rates, briefly fell by 6 basis points to 4.49%. The pound-euro exchange rate remained stable. Ahead of Thursday's rate decision, market traders had already fully digested the expectation that the Bank of England would raise rates three times by the end of this year, with the first rate hike scheduled for June. "Bailey's opening remarks sounded quite dovish," said James Ash, fund manager at Marlborough Investment Management. The interest rate market has reduced bets on the extent of rate hikes this year, pricing in about 66 basis points - roughly equivalent to two rate hikes, with slightly higher than a 60% chance of a third rate hike. Previously, the market had expected an increase of about 73 basis points. The market's conflicting psychology is that while the current status quo provides a brief respite, the Bank of England's internal language and the reality of rising oil prices are pushing the UK towards a forced tightening trajectory. Oil prices surging to $130 highlights extreme rate hike scenarios The core of this meeting was extraordinary in that the MPC directly abandoned its traditional core inflation forecasts and instead presented three risk scenarios based on energy price paths. This rare move underscores the high uncertainty brought about by the Iran conflict. Just before the decision was made public, news that US President Trump would be briefed on new military action options against Iran stimulated a surge in international oil prices to wartime highs, with Brent crude oil prices approaching $130 per barrel - this is the anchor level for the Bank of England's most pessimistic economic forecasts. In the worst case scenario listed by the Bank, assuming oil prices remain around $130 and trigger substantial "second-round effects", the model shows that rates needed to restrain inflation would increase significantly, with rate hikes ranging from 66 to 151 basis points. If a 151 basis point hike is needed, the market would face consecutive heavy blows far beyond the current pricing. Bailey noted that a majority of the committee, including himself, believe that inflation will peak at around 3.7% by the end of the year in the "central scenario" which only has some mild second-round effects. However, he quickly shifted his focus and emphasized that he "attaches great importance" to the most pessimistic scenario. In this scenario, inflation would peak at 6.2% in early 2027 and remain stubbornly above the 2% target throughout the entire forecast period. The governor's statement is akin to acknowledging that a substantial rate hike is a contingency that must be considered. The MPC's decision to hold steady is not a sign of neglect for inflation but a lack of balance in the face of an economy deeply entrenched in energy dependency and near stagnation. The committee believes that the financial tightening since the outbreak of the Iran conflict, weak economic growth, and a soft labor market are helping to contain inflation. But this natural "cooling effect" could be easily overwhelmed by external shocks from soaring energy prices. Bailey's statements may also be aimed in this direction. The transmission of the conflict is already evident: the latest data shows that the UK inflation rate in March rose to 3.3% due to soaring fuel prices. Greater pressure lies ahead, as it is expected that the price caps on UK natural gas and electricity will be significantly raised again in July, resulting in another wave of energy bill increases for thousands of households, keeping inflation securely above the warning line in the second half of 2026. The National Institute of Economic and Social Research (NIESR) in the UK this week explicitly warned that if the Middle East crisis worsens, the UK economy may fall into recession later this year, and will face a series of compulsory rate hikes - the specter of stagflation is hovering over the River Thames. The Eve of Global Tightening Resonance? The UK is in the "Eye of the Storm" The UK's decision is not an isolated event. It is intertwined with the caution and divergence of major central banks worldwide. On Wednesday, the Federal Reserve, soon to have one of Chairman Powell's last few meetings before stepping down, almost unanimously voted to keep rates unchanged. But the meeting also revealed deep divisions, with three officials opposing the related language suggesting the possibility of future rate cuts. On the same day, it was widely expected that while the European Central Bank would stay put at today's meeting, it would be forced to start hiking rates at the June meeting. The Bank of Japan similarly had a "hawkish pause" this week, and the market is also expecting hikes soon. The conflict in Iran, which has been ongoing for three months, is reshaping the global monetary policy landscape. Due to its heavy dependence on imported energy and natural gas, the UK is expected to be one of the developed economies most severely impacted by the conflict. The National Institute of Economic and Social Research in the UK issued a stern warning this week: if the crisis in the Middle East escalates further, the UK economy may fall into recession later this year, and be forced to adopt a series of rate hikes aimed at restraining imported inflation. Compared to the US and Europe, the UK, with its deep reliance on energy imports and natural gas, is the most fragile link in this round of geopolitical shocks. The Bank of England preserved the key phrase "ready to take action" in its statement, which currently implies that any movement in oil prices in the Middle East or price data on the shores of the North Sea could quickly ignite the rate hike fuse. The next step in UK interest rate policy is already fully entwined with the remote control of the energy crisis.