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.
Key events
The Bank of England has had a “crude awakening”, points out Deutsche Bank economist Sanjay Raja, as the rise in energy prices threatens to push up inflation.
Raja has abandoned his previous forecast for interest rate cuts this year, telling clients:
Policy risks are now one-sided. We are changing our BoE call. We no longer expect any rate cuts this year. We expect Bank Rate to stay put at 3.75% for the remainder of the year. And the prospect of rate hikes can no longer be discounted. The bar for rate hikes, we think, has fallen meaningfully – contrary to our previous view.
What will it take for the MPC to hike rates? One, limited fiscal support to curb inflation. And two, duration of the Iran conflict lasting into April (and beyond), extending the length of the inflation shock. Should fears of second-round effects ratchet higher, the case for a policy pivot in Q2-26 will likely strengthen. We will be monitoring this closely.
America’s Russell 2000 index of smaller companies has also been caught up in today’s market slide.
The Russell 2000 is down 0.7%, having briefly touched a 10% loss from its all-time intraday high earlier in the session.
Afternoon summary
Time for a recap….
A turbulent day in the financial markets has seen energy prices surge, and European stock markets fall.
UK and European gas prices have jumped 15% today, after yesterday’s attacks by Iran on energy infrastructure across the Middle East.
QatarEnergy has revealed that Iran’s strikes have damaged facilities responsible for producing 17% of the company’s LNG export capacity, and it could take three to five years to repair the damage.
Brent crude jumped by 10% at one state – extending the gap between Brent and US oil – before slipping back to $110 a barrel, up 3.3% today.
With anxiety over a lengthy period of disruption to energy supplies growing, European stock markets have tumbled. The UK’s FTSE 100 share index fell by almost 3% at one stage, dipping below the 10,000-point mark for the first time since early January.
European airline chiefs have warned that a prolonged conflict in the Middle East would lead to higher air fares as flight cancellations drive up costs and aviation fuel prices.
UK energy bills are on track to jump this summer too.
Faced with this disruption, central bankers are choosing to leave interest rates on hold until the situation is clearer.
The Bank of England maintained UK interest rates at 3.75% today, but also signalled that it could be forced to increase borrowing costs within the coming months.
It warned:
Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs. Prior to this, there had been continued disinflation in domestic prices and wages. CPI inflation will be higher in the near term as a result of the new shock to the economy.
The BoE now believes the US-Israel war on Iran threatens to drive inflation in the UK above 3%, and is fearful of ‘second round’ effects – a jump in wages, and prices in the shops.
The City money markets are now pricing in two rises in UK interest rates this year, which would lift them back to 4.25% by December.
Andrew Bailey, governor of the Bank, has pushed back against such forecasts, saying:
“I would caution against reaching any strong conclusions about us raising interest rates…. Today we’ve given a very clear message. The right place to be is on hold.”
The Bank’s decision came hours after new data showed a slowdown in pay growth across the UK:
The European Central Bank left its interest rates on hold today too, as did Switzerland and Sweden this morning.
The World Trade Organisaion has cut its forecast for trade growth this year, and warned that an extended period of high oil prices could “crimp” the AI boom.
The UK is to double tariffs on Chinese and other foreign steel in a bid to save its remaining plants from collapse.
Berenberg economist Andrew Wishart reckons the future direction for UK interest rates is still down, not up:
Beware of whiplash: The Bank of England’s (BoE’s) hawkish shift in tone does not mean an interest rate hike is next.
Yes, the BoE removed its bias towards rate cuts. Whereas in February it said “Bank Rate is likely to be reduced further” now it “stands ready to act as necessary” to ensure that inflation meets the 2% target in the medium term. Nonetheless, investors responded by pricing in at least two interest rate hikes this year.
The shift will immediately tighten financial conditions by raising the interest rates available on fixed-rate mortgages and corporate loans. In our view, this will help to ensure demand is too weak for a new price-wage spiral to form, and that the future direction of interest rates is down, not up.
Analysis: BoE delivers message Britons don’t want to hear
Phillip Inman
The US-Israel attack on Iran has already driven prices higher and not just at the petrol pumps, the Bank of England said on Thursday in a gloomy assessment of the UK’s economic outlook.
An inflation rate that was on track to fall from 3% to the Bank’s 2% target in the coming months is now expected to rise to 3.5%. That is one probable impact of the US and Israel’s war on Iran.
Higher transport and energy costs can quickly flow through to higher food prices, ratcheting up the consumer prices index when the previous trajectory was down.
It is not the news households wanted to hear after a long period of high inflation that everyone thought was over.
Likewise, businesses large and small will be reconsidering their investment decisions and how many people they hire as a result.
For the government, another rise in the cost of living is the last thing it needs heading into already difficult local elections…
More here:
European gas prices have slipped back a little from their earlier highs, but are still on track for significant gains today.
The UK month-ahead gas contract is up almost 15% at 160p a therm, having hit 175p this morning.
The continental European month-ahead gas contract is up almost 16%, at €63.2 per Megawatt hour.
Traders will have noted the news that Iran’s strikes on Qatar damaged facilities responsible for producing 17% of the company’s LNG export capacity (see earlier post).
CEBR: UK energy bills on track to top £2,100
UK energy bills are on track to exceed £2,100 per year, according to consultancy CEBR, due to the surge in oil and gas prices this month.
That would be a steep increase on the latest energy price cap, of £1,641 a year from April-June.
CEBR has calculated that the quarterly cap will rise sharply when it is next set (it is calculated from wholesale energy prices), saying:
The latest developments in the Middle East, including the recent strike on the Ras Laffan export facility, have pushed up wholesale energy prices. At current levels, this implies a Q3 Ofgem price cap exceeding £2,100 if sustained, with higher bills likely even if prices ease. The conflict is also expected to shave around 0.1 to 0.3 percentage points off UK GDP growth over the next year.
Gap between US crude and Brent has widened in crisis
Jillian Ambrose
Global oil prices have surged in response to escalating military aggression against key energy infrastructure in the Gulf – but in the US oil prices have barely budged in what could prove a double blow to Asian economies.
The widening gap between the international benchmark, Brent crude, and the US oil price known as the West-Texas Intermediary (WTI) has reached an 11 year high as traders begin to weigh the differing fortunes of world regions in response to the global energy supply shock.
The price of Brent has climbed by over 10% to over $119.13 a barrel earlier today, close to the peak touched on March 9, fuelled by fears that attacks on the Gulf’s regional infrastructure could prolong the supply crisis facing the Gulf’s biggest energy buyers in Asia and Europe. It’s now up 4% at $111.62/barrel.
But in the US, the world’s biggest energy producer, the WTI is up just 1.7% at $97.95 a barrel, reflecting the economy’s strong domestic production and strategic reserves.
While Brent crude typically trades at a premium to the WTI, the current oil price shock risks turning the crisis “into a regional wrecking ball”, according to asset manager Stephen Innes. Economies in Asia and Europe will be forced to weather higher outright oil prices relative to the US, but also contend with a stronger US dollar which makes buying oil on the dollar-denominated market even more expensive.
Innes said:
“If escalation continues, the next phase is not just higher oil but enforced behavioral change, where demand is rationed through price and inflation becomes embedded rather than episodic. That is when the shock evolves from a market event into an economic regime shift.”
The UK interest rate predictions market has calmed down slightly, since Bank of England governor Andrew Bailey suggested investors were getting over-excited in their predictions for higher interest rates.
The market is still fully pricing in one hike by June, and a second one in September.
But the prospect of a third rate rise has vanished from the money market pricing screen.
Paul Dales, chief UK economist at Capital Economics, told clients that the BoE is leaning a bit more towards rate hikes rather than cuts, adding:
That said, in an unusual move presumably in response to the markets pricing in 75 basis points of rate hikes, 100 minutes after the policy announcement Governor Bailey was quoted as saying “I would caution against reaching strong conclusions about us raising interest rates” and that “the markets are getting ahead of themselves in assuming rate rises”.
Prolonged high oil prices could ‘crimp’ AI boom, WTO warns
Heather Stewart
An extended period of high oil prices as a result of war in the Middle East could “crimp” the AI boom, the World Trade Organization’s chief economist has warned.
The war and its impact on energy and fertiliser costs is the main risk to the global economy identified in the WTO’s latest Global Trade Outlook.
But the Geneva-based body also raised a question mark about the continued strength of AI investment, which in 2025 helped to offset the hit to global trade from Donald Trump’s tariffs.
The WTO has cut its forecast for growth in world trade in goods to 1.9% this year, down from 4.6% in 2025.
And it warned that the slowdown could be even sharper; if crude oil and liquefied natural gas prices remain high throughout 2026 due to the conflict, global trade in goods could slow further to 1.4%, WTO economists said.
BoE’s Bailey: I’d caution against strong conclusions about rate hikes
Bank of England governor Andrew Bailey has suggested the financial markets might be getting carried away by forecasting several UK interest rate rises this year.
Speaking after rate hike expectations rose sharply this afternoon, Bailey told the BBC that traders shouldn’t reach “any strong conclusions” about the path of borrowing costs.
In a suggestion that financial markets are getting ahead of themselves, Bailey said:
“I would caution against reaching any strong conclusions about us raising interest rates…. Today we’ve given a very clear message. The right place to be is on hold.”
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.
Iran 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, meaning it may not be able to meet contracts over that time.
👀
EXCLUSIVE- QATARENERGY CEO TELLS REUTERS: WE MAY HAVE TO DECLARE FORCE MAJEURE ON LONG-TERM CONTRACTS FOR UP TO FIVE YEARS FOR LNG SUPPLIES TO ITALY, BELGIUM, KOREA AND CHINA
– From Reuters.
This is bad.— Ed Conway (@EdConwaySky) March 19, 2026
He says:
“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.”
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:
“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:
“We will take other steps to stabilise energy markets, including working with certain producing nations to increase output.”
