The surge in oil and gas prices has dented hopes of further interest rate cuts in a bruising setback for millions of borrowers.
Investors aggressively trimmed bets on another rate cut this month as soaring energy costs stoked fears of inflation.
According to financial markets, there is now just a one-in-three chance of a cut from 3.75 per cent to 3.5 per cent when the Bank of England’s monetary policy committee (MPC) announces its next decision on March 19.Â
The odds stood at 80 per cent last week before war erupted in the Middle East and fell to around 50-50 on Monday before another sharp drop on Tuesday morning.Â
And investors are now betting on just one more rate cut this year – rather than another two or three –Â with that potentially not coming until as late as November.
Borrowing costs spiked higher as the chances of further rate cuts fell, with the ten-year gilt yield surging above 4.5 per cent amid warnings of a repeat of the 2022 energy-shock when prices soared following Russia’s invasion of Ukraine.
That saw UK interest rates hiked to 5.25 per cent as the Bank of England battled to bring runaway inflation back under control.
Inflation fears: According to financial markets, there is just a 50% chance of a UK rate cut when the Bank of England announces its next decision on March 19
‘Investors are basically going back to the 2022 energy-shock template. That is very fresh in our minds. We saw how large and persistent the inflation shock was,’ said Rohan Khanna at Barclays.Â
Higher borrowing costs will be a blow to millions of households and businesses hoping for cheaper mortgages and loans.Â
The rise in the gilt yield is a headache for Chancellor Rachel Reeves, too, as she delivers her Spring Statement.
Jemma Slingo, a pensions and investment expert at Fidelity International, said: ‘Stubbornly high oil and gas prices could impact economies around the world. Specifically, they could be inflationary and disrupt plans to cut interest rates. The MPC has held several nail-biting votes in recent months, and conflict could complicate things further.’
Chris Beauchamp, chief market analyst at IG, said: ‘The huge bounce in European natural gas prices threatens to upset the more positive outlook for UK inflation and consumer spending.Â
‘Hopes that pricing pressures would ease and consumers could spend more could be dashed as a price spike similar to 2022 causes a major headache for both policymakers and consumers, potentially disrupting the plan for more UK rate cuts.’
The prospect of interest rates remaining elevated will fuel fears over the strength of the housing market.
Bank of England figures show there were just 59,999 mortgages approved for house purchase in January, down from 61,007 in December and lowest for two years.
Separate figures from Nationwide showed house prices rose by 0.3pc in February with a typical home now costing £273,176.
Simon Gammon, managing partner at Knight Frank Finance, said the fall in mortgage lending ‘reflected the economic uncertainty that lingered after the November Budget‘.
He added: ‘The outlook for activity and rates appeared relatively benign only last week, but conflict in the Middle East has introduced fresh uncertainty. Any spike in oil prices could fuel global inflation or, at the very least, prompt central banks, including the Bank of England, to delay further rate cuts until the outlook becomes clearer.’
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Blow to borrowers as soaring oil and gas prices shatter hopes of an interest rate cut