Bank of England to hold as geopolitics rewrites rate path

Discussing the likelihood of the Bank of England decreasing its base interest this week, John Wyn Evans, Head of Market Analysis at Rathbones, one of the UK’s leading wealth and asset management groups, said: 
“As the conflict in Iran enters its third week, markets are showing a surface calm that belies the scale of the risks. Equity indices have softened but remain far from disorderly, helped in part by the flush out of speculative positioning in week one. Yet no central banker will be reassured by this apparent resilience. Energy driven inflation shocks are notoriously difficult to ‘look through’, and both the Bank of England and the Federal Reserve will be acutely aware of how quickly a temporary spike can become entrenched.
"The early days of the Russia-Ukraine war still casts a long shadow. Then, policymakers underestimated the persistence of inflation and found themselves forced into a more aggressive tightening cycle than intended. The Bank is determined not to repeat that mistake. Inflation expectations have nudged higher, oil volatility is clouding the incoming data, and sterling has slipped as the dollar gains from the US’s advantageous terms of trade as a net energy exporter.
"Investors, too, carry the scars of 2022, when equities and bonds fell simultaneously. Some will worry we are heading for a repeat. I’d temper those concerns. Rates and yields are already far higher than they were in early 2022, making another dramatic reset in the price of money less likely. And whereas inflation then was fuelled by both excess demand and disrupted supply, today’s pressures are almost entirely supply driven. Higher energy prices are more likely to divert spending away from discretionary categories and suppress activity elsewhere rather than ignite a demand boom. That argues for central banks postponing cuts they had expected to deliver — not preparing to re tighten policy. Even so, the substantial tail risk of a longer energy supply constraint and further upward inflationary pressures means that we remain reluctant to venture too far down the duration curve in terms of fixed income allocations. 
"Across the Atlantic, the Fed faces a similar dilemma. Cuts have been pushed further out, with some pricing drifting into 2027, and financial conditions have quietly tightened. But the US enters this period with comparatively stronger economic momentum and a currency strengthened by terms of trade dynamics. Even so, Chair Kevin Warsh’s arrival brings uncertainties of its own — supportive of lower rates in principle, but also keen to shrink the Fed’s balance sheet, a shift that could unsettle liquidity conditions.
"Against this backdrop, the Bank of England is unlikely to surprise this week. Rate cuts once seen as plausible for spring have been fully priced out, and a rise later in the year can’t be dismissed. With the duration of the conflict unclear, the most probable outcome is a holding pattern: not tightening, but certainly not loosening until the fog lifts.”