Nomura’s European rates team notes that higher Oil prices and stronger UK data have turned the Bank of England’s March decision into a close call. They still forecast a 25 bps cut in March and another in June, but stress that incoming data and the evolution of Middle East risks and energy prices will be crucial.

BoE weighs Oil shock and data

"The key question for the BoE is whether the potential inflation impact of higher oil prices will prevent a March rate cut. Market pricing has moved markedly from over 21bp for a March cut last Friday to only around 13bp today."

"We still expect a 25bp policy rate cut at the March meeting and another in June, but flag that the decision is now a very close call and will likely depend on how oil prices develop further in the coming weeks (which in turn depends on the duration of the geopolitical crisis, if ships can travel through the Strait of Hormuz, and whether there is lasting damage to GCC oil and gas infrastructure)."

"Stronger economic data released in February (private regular wage growth, sticky services inflation, a large rise in retail sales and better-than-consensus-expected PMI figures) already led us to question whether the market was overly-confident about a rate cut at the March meeting."

"Data released between now and the 19 March BoE decision will be key to watch, including how inflation expectations develop in the Decision Maker Panel survey this Thursday. There is also another UK labour market report on the morning of the March announcement (which the BoE will have seen in advance), and policymakers should also have a preliminary estimate of the February CPI print due the following week."

"If these releases show some further evidence of wage and services disinflation, we believe it should convince policymakers to cut at this month’s meeting. But military action in the Middle East and the knock-on effects on energy markets add to the risks for no change at the March meeting."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)