Investing.com — Deutsche Bank analysts predict the Bank of England will keep interest rates unchanged at 3.75% when it meets on Thursday, reversing their earlier expectation of a March rate cut due to heightened geopolitical risks stemming from the Iran conflict.
The German bank now expects a 7-2 vote split, with seven members voting to hold rates steady while Dhingra and Taylor are expected to vote for a quarter-point cut. This marks a shift from February’s narrow 5-4 decision, when four members supported an immediate rate cut.
“A couple of weeks ago, a March rate cut seemed to us inevitable. Fast forward to today, however, geopolitical events have raised some serious upside risks to inflation,” Deutsche Bank Chief UK Economist Sanjay Raja wrote in a note distributed Friday.
Energy prices have surged since the Iran shock began, with oil prices tracking 25% higher and gas prices up 26% compared to levels assumed in the BoE’s February Monetary Policy Report. These increases are expected to add approximately 0.3 percentage points to consumer price inflation in 2026.
The January inflation report already exceeded BoE projections, with headline CPI at 3% year-over-year, 11 basis points above the bank’s estimate. Core CPI came in at 3.1%, 18 basis points higher than expected, while services CPI reached 4.4%, beating forecasts by 24 basis points.
Deutsche Bank expects the MPC to signal a wait-and-see approach until uncertainty around the Iran conflict subsides. The bank projects two rate cuts this year, now expected in June and November, leaving the terminal rate at 3.25%.
The UK economy showed weakness in the fourth quarter of 2025, with GDP growth of just 0.05% quarter-over-quarter, falling short of BoE projections by 11 basis points. The unemployment rate reached 5.2% in December, slightly above the central bank’s forecast.
Deutsche Bank estimates current market conditions will lower GDP growth by 0.25 percentage points in 2026 and 0.1 percentage points in 2027, while pushing the peak unemployment rate to near 5.4%.
The bank expects the MPC to emphasize that current conditions differ significantly from 2022, noting that fiscal policy is tightening, monetary policy remains restrictive, and the labour market has loosened considerably with unemployment up 1 percentage point over the past year.
For the next rate cut to materialize in June, Deutsche Bank says two conditions must be met: a resolution to the Iran conflict that brings energy prices down, and evidence that core inflation remains contained relative to BoE projections.