The March MPC minutes marked a clear shift in the stance of UK monetary policymakers following the rise in energy prices amid the war in Iran. Markets moved quickly to price a more aggressive path for UK interest rates, including the possibility of further tightening in upcoming meetings. The rhetoric from key MPC members over the past week suggests that aggressive pre-emptive monetary tightening is not a given, and rate markets may be pricing a worst-case, or at least highly negative, scenario.
The unanimous vote to hold Bank Rate at 3.75%, against a consensus of 7-2, was seen as significant, given the perception that some MPC members would view the risks to growth as material enough to vote for an immediate Bank Rate cut. The minutes showed that even those previously leaning towards cuts had stepped back in the face of the energy shock, possibly with arch-dove Swati Dhingra’s comment that “this could warrant a hold or increase in Bank Rate to stabilise price-setting dynamics” being the primary influence. The language around being “ready to act” and the explicit reference to second-round effects were clearly hawkish.
While having an unsurprisingly hawkish tone given the situation, the minutes were, however, relatively balanced, highlighting the downside risks to growth as well as the upside risks for inflation. To finish Dhingra’s comment above, “… albeit creating a difficult trade-off with activity following a prolonged period of weakness”. But the market responded aggressively – SONIA forward curves, already pricing in two rate hikes, moved to price in four (and currently rest around three).
Was the market’s response then, and the slightly more measured rate path priced in now, in line with what policymakers were thinking?
The honest answer is that one, we don’t know, and two, it depends on the length and impact of the war. However, there have been some comments from policymakers that perhaps signal they are not completely on board with the market’s priced path.
First, Andrew Bailey’s remarks shortly after the meeting indicated that markets had moved too far, too quickly. He cautioned against “reaching strong conclusions” about the need for rate hikes. These comments suggest that the Bank is keen to prevent it from becoming entrenched if it is not justified by the data, especially because market movements can inadvertently tighten policy with negative repercussions for economic activity. While some element of tightening may have been deemed helpful by policymakers to send a strong message about their lack of tolerance for inflation, the initial response clearly exceeded this.
The response is indicative of investors’ memory of 2022. The Bank initially resisted tightening to combat sharply rising inflation, but eventually, somewhat led by the market, required much higher rates to calm second-round inflation effects. This also likely coloured the MPC’s minutes, and prompted a potentially more hawkish tone than may have been necessary.
Other MPC members have been similarly measured. The most significant of which is Megan Greene, whose stance has been firmly hawkish. Her recent comments were clear, explicitly stating that she “wasn’t tempted to hike” at the March meeting, and while a rise in inflation expectations increased the risks to the inflation target, it was not certain that it would feed into big wage rises. So, not conclusive about future meetings (her comments in the minutes certainly did lean hawkish), but it does suggest that the currently weaker economic situation is playing on (even hawkish) policymakers’ minds.
The reasons are fairly intuitive. The labour market is softer, wage growth has been decelerating, and demand conditions are weaker. That reduces the likelihood that a spike in energy prices will translate into a sustained inflation problem. If that is right, then the case for immediate tightening weakens significantly.
Sarah Breeden’s comments reinforce this point. She has argued that the risk of second-round effects is lower than it was in 2022. She said that "there's slack in the labour market, and it's rising. And the outlook for activity was lacklustre even before the energy shock," making the point that the energy shock is not just an upside for inflation, but actually a downside risk for growth.
Alan Taylor’s speech adds another layer. By framing the situation as a supply shock with uncertain duration, he has argued that patience is key. Monetary policy cannot offset higher global energy prices directly, so will prices remain elevated long enough to affect domestic inflation dynamics? Until that becomes clear, there is little case for rushing into further tightening.
So, a picture of uncertainty is emerging, with policymakers wanting more information before leaping into decisions that could be damaging later. Clearly, the MPC is unsurprisingly more concerned about inflation risks than it was a month ago, and it wants to keep the option of tightening on the table, but policymakers acknowledge that we cannot simply look at 2022 as the textbook for the policy response.
Markets, by contrast, are pricing rapid tightening, with over two rate hikes being priced in up to and including the July MPC meeting. That looks premature based on recent rhetoric. The key issue is persistence. The MPC is focused on whether the energy shock feeds into wages, services inflation and expectations in a sustained way. Clearly, with the war only a month old, that threshold has not been met, but the Citi YouGov household inflation expectations survey will have certainly raised a few eyebrows – households have clearly not forgotten the effect of the Ukraine war either. Policymakers clearly have a range of views on whether higher expectations will breed persistence; Breeden’s remarks suggest it may be less likely than in previous episodes, and Bailey’s intervention suggests the Bank does not want markets to assume the path for monetary policy has already been set.
From a rates perspective, this leaves us in a familiar position. The direction of travel has become more uncertain, as the MPC’s reaction function to various data points is currently unclear. The most likely outcome, based on current information, is that the Bank stays on hold while it assesses incoming data. If there is clear evidence of second-round effects, then tightening could come back into play, but, as always, policymakers have a fine line to tread.
30/03/2026
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