Bank of England set to hold interest rate steady as war-driven inflation clouds outlook

The Bank of England (BoE) is widely expected to hold the benchmark Bank Rate unchanged at 3.75% for a third consecutive meeting on Thursday, as traders assess the impact of the Middle East war on prices and the UK economy. The Persian Gulf conflict-led elevated oil prices have raised inflation concerns and kept expectations of a BoE rate hike this year on the table. Against this backdrop, the Monetary Policy Committee (MPC) policymakers are seen voting 8-1 to leave rates unchanged at the April monetary policy meeting, following a unanimous hold in March. It’s a “Super Thursday” – the Monetary Policy Report (MPR) will be published alongside the policy statement and the Minutes of the meeting at 11:00 GMT, followed by a press conference from Governor Andrew Bailey at 11:30 GMT. The volatility around the Pound Sterling (GBP) is expected to ramp up on the United Kingdom (UK) central bank’s policy events. With the US-Iran conflict entering its third month and no signs of a breakthrough concerning the Strait of Hormuz, investors are waiting to see whether the BoE offers any hints on a potential interest rate hike later this year as the war impact continues to feed into inflation. Data from the Office for National Statistics (ONS) show that the UK inflation, as measured by the change in the Consumer Price Index (CPI), rose to 3.3% year-over-year (YoY) in March from 3.0% in February, showing the first hit from the Iran war. Services inflation was up, though only because of volatile air fares due to the Easter holidays. The key question is whether the leap in energy prices would ignite broader inflation or a weak jobs market would keep a lid on demand for higher pay and price increases by companies. The latest labor market data showed that British wage growth slowed further, as Average Earnings, excluding Bonus, came in at 3.6% YoY in the three months ending February, down from 3.8% in the three months to January. That being said, the BoE’s updated inflation and growth projections in the MPR will be closely scrutinized for fresh guidance on the rate outlook, especially after the central bank said in March that it “stands ready to act” to combat inflation stemming from the war. Meanwhile, Ofgem, the UK’s energy regulator, cut its price cap by 7% in April, reducing typical annual household energy bills, although that could be offset by the war impact and tax rises as the new tax year begins. Therefore, the BoE will likely stick to its wait-and-see stance, reiterating that it remains ready to act on inflation, trying to balance market expectations around prospects of higher inflation and a rate hike later this year. Analysts at BBH noted, ‘the swaps curve is pricing nearly 75bps of rate hikes over the next twelve months to 4.50%. BoE rate hike bets are too rich in our view given excess slack in the economy.’ In February, the BoE estimated a negative output gap of -1% of GDP in 2026. The MPR will include an update of that estimate. How will the BoE interest rate decision impact GBP/USD? The GBP remains below the 1.3600 barrier against the US Dollar (USD) in the lead-up to the BoE’s showdown. If the BoE’s statement and Governor Bailey stick to the cautious rhetoric while the MPC vote split aligns with market expectations or surprises with a unanimous hold, the Pound Sterling could see a fresh breakdown, driving GBP/USD toward the 1.3400 level. Conversely, the GBP could extend the uptrend toward the 1.3700 round figure against the USD should the central bank express concerns over inflation, signaling a hawkish pivot. The GBP could also gain traction if the MPC vote split shows more than one dissenter on a no-rate-change decision.