A Reuters poll released on 12 March says economists expect the Bank of England to keep interest rates unchanged at its March meeting. The poll finds 85% expect the bank rate to stay at 3.75% on 19 March, up from 35% in February. The median forecast points to the bank rate falling to 3.25% by the end of September. It is then expected to remain at 3.25% until at least the end of 2026.

Bank Inflation Outlook Before Iran War

In the Monetary Policy Report published on 5 February, the Bank projected CPI inflation would slow to 2.1% in 2026 Q2. That projection was made before the Iran war began. The Bank will meet on 18 March and announce its decision on 19 March. The next Monetary Policy Report is due at the 30 April meeting. The Bank of England sets monetary policy to meet a 2% inflation target, mainly by changing base lending rates. These decisions affect borrowing costs across the economy and can move the value of sterling. When inflation is above target, higher rates can support sterling; when inflation is below target, lower rates can weigh on it. Quantitative easing involves creating money to buy assets and can weaken sterling, while quantitative tightening reduces bond purchases and can support sterling.

Market Expectations Then Versus Now

Looking back at this time in 2025, the consensus was clear that the Bank of England would hold rates before starting a cutting cycle later in the year. That view was based on inflation projections that did not account for the subsequent geopolitical shocks. The expectation for rates to be at 3.25% by now has not materialized. The Iran war, which began in mid-2025, created a significant energy price shock that disrupted the disinflationary trend. We saw Brent crude prices spike to over $110 a barrel in the third quarter of 2025, feeding directly into higher transport and energy costs for British consumers. This unforeseen event made the Bank’s previous inflation forecasts obsolete. As a result, inflation has remained stubbornly high, with the latest CPI data for February 2026 coming in at 3.4%, well above the Bank’s 2% target. This is a stark contrast to the BoE’s projection from February 2025, which saw inflation falling to 2.1% by this quarter. The reality of persistent price pressures has completely altered the interest rate landscape. Consequently, the Bank of England never initiated the cutting cycle forecasted last year; the Bank Rate today stands at 4.0%. Recent Office for National Statistics data showed the UK economy stalled with 0% growth in the last quarter of 2025, raising concerns about stagflation. This puts the Bank in a difficult position ahead of its meeting next week. For the coming weeks, traders should be positioned for continued hawkishness from the Bank of England. Derivative markets are now pricing in a low probability of any rate cuts before the end of 2026. Any trades betting on lower rates, which seemed sensible in early 2025, now carry significant risk. This environment suggests looking at options to trade volatility around the Pound Sterling. While higher-for-longer rates are theoretically supportive for GBP, the weak growth outlook provides a strong headwind, creating uncertainty. Volatility in GBP/USD has picked up, with one-month implied volatility now trading near 8.5%, up from 6% at the start of the year. Traders should also monitor UK Gilt markets, as the yield on the 10-year Gilt has remained elevated around 4.3%. Interest rate futures can be used to hedge or speculate on the Bank holding rates firm through the summer. The focus must be on incoming inflation and wage data, as these will be the primary drivers of monetary policy. Create your live VT Markets account and start trading now.

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