Barclays expects the Bank of England to hold rates steady at its March meeting

Investing.com - Barclays has revised its forecast for the Bank of England’s March meeting, now expecting the central bank to keep the bank rate at 3.75%, rather than the previously anticipated 25 basis point cut.

In a report released on Friday, the investment bank noted that ongoing conflicts in the Middle East, rising energy prices, and increasing geopolitical uncertainties could lead the Monetary Policy Committee to hold rates steady at the March 19 meeting.

Barclays warned that sustained increases in energy prices pose a risk to its baseline forecast, which expects economic growth to improve and inflation to gradually return to the 2% target.

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The ongoing energy crisis and trade disruptions caused by the closure of the Strait of Hormuz could impact UK economic activity through various channels and have a secondary effect on core inflation, depending on how the crisis develops in the coming weeks.

The bank pointed out that markets are no longer expecting a rate cut this year. Since the Monetary Policy Committee is currently in a silent period, Barclays believes that maintaining rates and managing expectations through communication is the most likely outcome.

UK real GDP was flat in January, below Barclays’ forecast of a 0.1% monthly growth, posing downside risks to its first-quarter outlook. Industrial production shrank by 0.1% month-on-month, while services activity remained flat.

Within industrial production, mining and quarrying declined by 3.2% month-on-month, while manufacturing grew by 0.1%. Administrative and support services contracted by 2.3%, contributing a negative 0.16 percentage points to monthly services growth.

The Bank of England/Ipsos Q1 inflation expectations survey showed that inflation expectations over the next 12 months fell by 0.3 percentage points to 3.2% from Q4 last year. However, the five-year inflation outlook remained steady at 3.7%. The survey was conducted from February 6 to 24.

Barclays forecasts that the unemployment rate will rise to 5.3% in the January labor market report released on March 19, up 0.1 percentage points from December. The bank expects private sector wage growth to increase by 0.1 percentage points year-on-year to 3.5% over three months.

Barclays stated that rising energy prices would weaken trade conditions, suppress real income growth, and curb consumer spending. Supply disruptions could also create bottlenecks for inputs needed in manufacturing.

The ongoing energy crisis may prompt the government to introduce fiscal measures to support businesses and households, although given the Chancellor’s limited fiscal space of just over £20 billion, policies are likely to be more targeted.

Opposition parties have called for the cancellation of the planned phased recovery of the 2022 5p fuel duty cut, which was scheduled to begin in September 2026 and be phased out over six months.

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