Bank now expected to raise interest rates twice this year
City traders are betting that the Bank of England will raise UK interest rates at least twice this year, to combat the inflationary hit from the Middle East crisis.
The money markets are now fully pricing in a quarter-point rise in Bank rate, to 4%, by June.
A second hike, to 4.35%, is fully priced in by September.
These implied interest rates are volatile today, though.
Traders are reacting to the Bank’s prediction that inflation will average 3% in the second quarter of this year, not fall to 2.1% as previously expected (see here).
They are also noting its concern about the risks of “second-round effects in wage and price-setting” – that high energy bills will lead to higher wage demands, and higher prices in the shops.
Updated at 08.34 EDT
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Wall Street joins the sell-off
There are losses on the New York stock market at the start of trading, but rather more modest than in Europe today.
The Dow Jones Industrial Average has lost 205 points, or 0.44%, in early trading to 46,020 points. It contains 30 large US companies.
Boeing (-3.4%) and Caterpillar (-2.6%) are the biggest fallers, as investors anticipate a protracted period of energy disruption which would hurt demand for airlines and construction equipment.
The broader S&P 500 share index has dropped by 0.5%.
In contrast, Europe’s Stoxx 600 index is down almost 2.5% today, after Japan’s Nikkei shed 3.4% overnight.
ShareIran attack damage wipes out 17% of Qatar’s LNG capacity for three to five years
NEWSFLASH: Iran’s attacks on Qatar have damaged facilities that produce 17% of QatarEnergy’s liquefied natural gas export capacity, and it could take several years to repair the damage.
That’s according to QatarEnergy CEO Saad al-Kaabi.
Speaking to Reuters a day after the attack on Ras Laffan, Qatar’s huge industrial complex, al-Kaabi suggested it could take three to five years to repair them.
He says:
double quotation mark“I never in my wildest dreams would have thought that Qatar would be – Qatar and the region – in such an attack, especially from a brotherly Muslim country in the month of Ramadan, attacking us in this way.”
Updated at 09.50 EDT
European countries and Japan: ready to help on Hormuz, stabilise energy markets
Now this is interesting….
Britain, France, Germany, Italy, the Netherlands and Japan have said they will take steps to stabilise energy markets and were ready to join “appropriate efforts” to ensure safe passage through the Strait of Hormuz.
In a join statement, the countries also condemned attacks by Iran and called on it to halt its actions immediately.
They say:
double quotation mark“We express our readiness to contribute to appropriate efforts to ensure safe passage through the Strait.
We welcome the commitment of nations who are engaging in preparatory planning.”
The statement also welcomed the release of strategic petroleum reserves, adding:
double quotation mark“We will take other steps to stabilise energy markets, including working with certain producing nations to increase output.”
ShareWhy the Bank of England is really worried
The Bank of England’s MPC is “really worried” about the inflationary impact of the oil shock, Professor Costas Milas of the Management School at University of Liverpool tells me.
A chart showing the inflationary impact of higher oil prices Photograph: Professor Costas Milas
Professor Milas explains:
double quotation markTo see this, I plot the impact of the oil shock (assuming oil prices stay at their current level for a while rather than dropping fast or even…rising further).
UK inflation rises by up to 1.5 percentage points by the end of the year and reaches a peak in early 2027. The impact is statistically significant (using a 95% confidence interval) in a model of oil prices, inflation, UK growth and Bank Rate. This is clearly a nasty oil price shock…
ShareECB leaves eurozone interest rates on hold and hikes inflation forecasts
The European Central Bank has voted to leave eurozone interest rates unchanged.
Announcing its decision, the ECB says it is “determined to ensure that inflation stabilises at the 2% target in the medium term”.
The eurozone central bank warns:
double quotation markThe war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth.
It will have a material impact on near-term inflation through higher energy prices. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy.
It has also lifted its inflation forecasts, due to the Middle East war. Headline inflation is now expected to average 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028.
Back in December, the ECB had forecast inflation would be 2.2% in 2026, 1.9% in 2027 and 2.0% in 2028.
ShareFTSE 100 share index dips below 10,000 points
The stock market selloff is accelerating in London.
Almost 3% has been wiped off the blue-chip FTSE 100 share index so far today. It just fell below the 10,000 point mark, hitting 9997.41 points, its lowest since 8 January, before struggling back to 10,004 points…
Apart from BP (+2.5%), every share on the index is down today.
Precious metal producers Fresnillo (-9.2%) and Endeavour Mining (-9%) are leading the sell-off, with banks, and mining companies also among the top fallers.
Before the Iranian war began, the FTSE 100 hit 10,934 points – so it’s lost 8.5% of its value since, hitting the value of pension funds and ISAs across the UK.
Updated at 09.19 EDT
The market panic caused by the Middle East crisis is continuing to ripple across assets today.
Silver has tumbled by almost 11% to $67.1 an ounce.
Gold is down 5.7% at $4,539 an ounce.
ShareTwo-year bond yields on track for biggest jump since 2022 mini-budget crisis
UK government bond prices are being hammered by City traders, following the Bank’s warning that the energy crisis could create ‘second round’ effects to push inflation higher.
With prices falling, the yields (or interest rate) on UK gilts are pushing sharply higher.
Shorter-dated UK bonds are particularly hit.
The yield in two-year gilts have jumped by 35 basis points (0.35 of a percentage point) to 4.47%, the highest since January 2025.
That puts them on track for the biggest daily increase since Liz Truss’s “mini-budget” crisis of September 2022.
The Bank of England MPC must have had one of their most difficult meetings, before deciding to leave rates unchanged today, suggests Michael Browne, global investment strategist at Franklin Templeton Institute.
He writes:
double quotation markWhat should they do in the face of a very real inflationary threat? As we dust off the 2022 playbook, we know the damage energy driven inflation can inflict – but to use the Scottish legal term, it is not yet proven.
“Last night, US markets sold off sharply after [Federal Reserve] chairman Powell failed to sound tough enough. Bond markets are nervous and need reassurance that monetary authorities are on top of their brief and prepared to raise interest rates sooner rather than later.
The minutes suggest the MPC is very alive to the risks and while that may not be enough for the market today, investors should be re-assured that they will act, even though a rate rise would be bad news for the economy.”
In the parallel universe where the US and Israel didn’t attack Iran on 28 February, we’d probably be talking about a cut to interest rates today.
Just before the war, a rate cut today was seen as an 80% chance by the money markets.
Bank deputy governor Sarah Breeden says she would have expected to vote for a cut today, has circumstances not changed:
double quotation markConflict in the Middle East has significantly shifted the outlook for inflation. Absent this shock, the underlying disinflation process had continued broadly as I expected and, consistent with my vote in February, I would have expected to vote for a cut again in March. But the conflict will have a significant, though at this point highly uncertain, impact on inflation.
Updated at 08.41 EDT
Why are mortgage rates going up when the Bank of England base rate hasn’t changed?
Although the Bank of England has left rates on hold today, mortgage rates have been rising since the Iranian war began.
Here’s why:
ShareShareBank now expected to raise interest rates twice this year
City traders are betting that the Bank of England will raise UK interest rates at least twice this year, to combat the inflationary hit from the Middle East crisis.
The money markets are now fully pricing in a quarter-point rise in Bank rate, to 4%, by June.
A second hike, to 4.35%, is fully priced in by September.
These implied interest rates are volatile today, though.
Traders are reacting to the Bank’s prediction that inflation will average 3% in the second quarter of this year, not fall to 2.1% as previously expected (see here).
They are also noting its concern about the risks of “second-round effects in wage and price-setting” – that high energy bills will lead to higher wage demands, and higher prices in the shops.
Updated at 08.34 EDT