Investing.com — Barclays maintained its forecast for a 25 basis point Bank of England rate cut in March but warned the decision has become highly uncertain following escalating Middle East tensions that have driven up energy prices.
The energy price surge could add 0.15 percentage points to headline inflation cumulatively over March and April if oil prices average $80 per barrel during those months, according to Barclays calculation in a note published on Friday.
However, this would not materially prevent consumer price index inflation from returning to the Bank of England’s 2% target in April.
As of 12:00 GMT on Monday, Brent crude traded at $103.13 per barrel, amid concerns that the Iran conflict could disrupt global oil supplies.
Gas price changes will affect CPI with a delay, as the Ofgem cap for the second quarter has already been set. The third quarter cap change, to be announced by May 27, could increase 8% quarter-on-quarter based on current futures pricing, Barclays said.
This would eliminate the 7% cap decline expected in the second quarter and add 0.23pp to headline inflation in July.
The bank warned that a prolonged period of elevated energy prices would likely feed into goods prices through increased transport costs and potential supply chain disruptions. The duration of the shock will be crucial, as the 12-day war between Israel and Iran in June 2025 had little macroeconomic impact due to its brief nature.
The Monetary Policy Committee will need to weigh backward-looking data against the potential persistence of energy price shocks, the weakness of the domestic economy, and the value of delaying a cut to see if uncertainty subsides, Barclays said.
The bank expects labour market data due March 19 to be softer than the MPC forecast in February. Barclays believes the 12 days before the MPC decision provide reasonable opportunity for Middle East uncertainty to subside, supporting its expectation for a rate cut, though it characterized the decision as on a knife edge.
The Decision Makers Panel showed one-year ahead CPI expectations fell 0.1pp to 3.1% on a three-month rolling average basis in February. The three-year ahead measure also declined 0.1pp to 2.8%. However, the survey was conducted over February 6-20 and does not reflect recent energy price developments.
Chancellor delivered a Spring Statement on Friday with no policy changes. The Office for Budget Responsibility revised near-term growth down to an average of 1.1% in 2026, down 0.3pp, but offset this with growth of 1.6% in both 2027 and 2028. Inflation was revised down to an average of 2.3% in 2026.
The current budget surplus is projected to be £23.7 billion in fiscal year 2029-30, increasing the chancellor’s headroom against her fiscal rule by approximately £2 billion. Public sector net borrowing was revised down to 4.3% of GDP in the current fiscal year.
Barclays expects January monthly GDP data, due March 13, to show the economy grew 0.1% month-on-month, with industrial production up 0.2% and services up 0.1%.