Key Points
- Bank of England policymaker Swati Dhingra stated on Friday that the ongoing Middle East energy crisis makes future interest rate decisions “very hard to say”
- Dhingra spoke during an event hosted by University College London, highlighting the energy crisis as the “big elephant in the room” complicating rate outlook
- According to minutes from the Bank’s April meeting, Dhingra said rate cuts could become appropriate again if the Middle East conflict resolves quickly and oil prices retreat sharply
- If the crisis deepens, Dhingra warned that additional tightening may be necessary
- Before the Iran war erupted in late February, Dhingra had been among the most dovish MPC members, voting to cut rates by a quarter point in February
- Oil prices surged to near $130 for the first time since the onset of the Iran conflict, with the Strait of Hormuz effectively closed to most commercial traffic
- Current UK inflation stands at 3.3%, moving further from the Bank’s 2% target
- In the Bank’s worst-case scenario (Scenario C), if oil prices remain above $120 per barrel for the remainder of the year, inflation could peak at 6.2% at the start of 2027
- This worst-case scenario could necessitate up to six interest rate increases, pushing rates back to 5.5%
- Markets are pricing in roughly an 80% chance of a quarter-point hike by September, with traders seeing little chance of a rate increase at the Bank’s later this month meeting
- The June 18 meeting is seen as the most likely for a potential hike, with futures markets predicting a 56% chance
- UK interest rates currently stand at 3.75%, following the Bank’s February 2026 decision to hold rates after six cuts ending in December 2025
- Chancellor Rachel Reeves has admitted the Middle East crisis is likely to “put upward pressure on inflation” in the coming months
- Bank of England Governor Andrew Bailey stated the surge in energy costs has been “a very big shock” and expressed concern about effects on lower-income families
- The Monetary Policy Committee voted 9-0 in favour of holding rates at their mid-March meeting, despite one member highlighting ongoing inflation risks
- MPC member Catherine L Mann stated in meeting minutes that “the balance between inflation and activity has shifted away from considering a cut toward considering a longer hold, or even a hike”
- Energy bills are anticipated to rise when the current price cap is revised in early July
- The uncertainty mirrors concerns voiced by US central bankers, with Kansas City Fed President Jeffrey Schmid warning the oil shock may not be as transitory as hoped
The most critical development in UK monetary policy is that Bank of England policymaker Swati Dhingra has declared the Middle East oil crisis makes future interest rate decisions virtually impossible to predict, marking a dramatic shift from her previously dovish stance and forcing central bankers on both sides of the Atlantic to confront whether this energy shock represents a temporary spike or persistent inflationary pressure. With oil prices surging near $130 per barrel and the Strait of Hormuz effectively closed to commercial traffic, the Bank faces three scenarios ranging from inflation falling below 3% by autumn 2027 to a worst-case scenario where inflation peaks at 6.2% and requires six rate hikes pushing borrowing costs to 5.5%. Markets now price in an 80% chance of a quarter-point rate increase by September, with the June 18 meeting viewed as most likely for a hike, fundamentally overturning earlier predictions that rates would gradually decline throughout 2026.
What Did Swati Dhingra Say About the Oil Crisis and Rate Outlook?
As reported by Julianne Geiger of Oilprice.com, Swati Dhingra stated during an event hosted by University College London: “If you ask me what’s my interest rate decision next month going to look like or in the future, I think that’s very hard to say, because the big elephant in the room here is what happens to the energy crisis”.
The Reuters report by their business and energy team confirmed Dhingra’s message that “the extreme difficulty of knowing how energy prices will change as a result of the conflict in the Middle East makes it very hard to give a steer on the future course of interest rates”.
According to the Yahoo Finance report covering the same event, Dhingra remarked: “When it comes to forecasting what my interest rate decision will be next month or in the future, it’s quite challenging to determine, as the major factor we must consider is the energy crisis”.
How Has Dhingra’s Stance Changed Since the Iran War Erupted?
As documented by Julianne Geiger of Oilprice.com, before the Iran war erupted in late February, “Dhingra had been among the most dovish members of the Bank of England’s Monetary Policy Committee. She voted to cut rates by a quarter point in February while most of her colleagues preferred to stay put”.
The same report explains that “that was before crude prices surged and the Strait of Hormuz effectively closed to most commercial traffic. Since then, the calculus has become considerably more complicated”.
According to minutes from the Bank’s April meeting referenced by multiple sources, Dhingra said rate cuts could again become appropriate if the conflict is resolved quickly and oil prices retreat sharply. However, she warned that “if the crisis deepens, however, additional tightening may be necessary”.
The Global Banking and Finance report confirmed that “Dhingra previously dissented in February in favor of a rate cut, noting it would be appropriate if energy prices fell sharply—but advocated possible tightening if the situation deteriorated”.
What Are the Bank of England’s Inflation Forecast Scenarios?
As reported by the BBC, the Bank of England is exploring various scenarios due to “uncertainty regarding the intensity and duration” of the conflict.
Scenario A: According to the BBC report, in this scenario “energy prices decrease, leading to an inflation rate of 3.6% by the end of this year before dropping below 3% by autumn of the following year”.
Scenario B: The BBC explains this scenario “envisions a slower decline in energy prices, with inflation rising to 3.7% this year and remaining elevated for a longer duration”. Governor Bailey indicated he places greater emphasis on Scenario B.
Scenario C (Worst Case): As detailed by the BBC, this “most severe outcome anticipates oil prices staying above $120 a barrel for the remainder of the year, causing inflation to peak at 6.2% at the start of next year”. The report states this scenario “could necessitate as many as six interest rate increases to reach 5.5%”.
The Times reported that according to a worst-case scenario outlined by the monetary policy committee, “if oil prices remain at $130 for a substantial part of the year, inflation—which currently stands at 3.3 percent—could exceed 6 percent”.
What Do Market Traders Expect for Future Rate Decisions?
As reported by Julianne Geiger of Oilprice.com, “markets appear to be leaning toward the latter risk. Traders see little chance of a rate increase when the Bank of England meets later this month, but are pricing in roughly an 80% chance of a quarter-point hike by September”.
According to the Morningstar report by their economy team, “futures markets currently predict a 19% chance of a hike at the next meeting on April 30 and a 56% chance at the June 18 meeting”.
The same Morningstar analysis states that “markets now expect rates to end 2026 around 4%, with June the most likely meeting for a hike”.
Earlier forecasts of multiple hikes have been scaled back, and the report notes that “rate cuts expected at the start of 2026 are now off the table”.
What Did Other MPC Members Say About the Inflation Risk?
As reported by Morningstar, MPC member Catherine L Mann stated in the meeting minutes: “Since the conflict may yield a sustained inflation shock, I see the balance between inflation and activity to have shifted away from considering a cut toward considering a longer hold, or even a hike at some point to lean against inflation persistence”.
The same report confirms that “while recent interest rate decisions have been decided by single votes, Monetary Policy Committee members voted 9-0 in favor of the hold” at the mid-March meeting.
Bank of England Governor Andrew Bailey, according to the BBC, stated in an interview that “the surge in energy costs since the onset of the conflict has been ‘a very big shock’ and expressed concern regarding the effects on lower-income families”.
What Are Economists’ Views on Potential Rate Hikes?
As reported by the BBC, Ruth Gregory, deputy chief UK economist at Capital Economics, observed that “the Bank of England’s remarks imply an increasing likelihood of imminent rate hikes”.
Gregory stated that if oil prices revert to around $95 per barrel, “our best estimate is still that rates will not change this year,” but she cautioned that “one or two rate increases in the forthcoming months are certainly plausible, particularly if oil prices hover around $115 per barrel or increase further”.
The National Institute of Economic & Social Research (Niesr), according to Alliance News reported by Morningstar, warned that “interest rates in the UK could be pushed back up above 4% if war in the Middle East prompts a persistent spike in oil and gas prices”.
Niesr’s analysis suggests “the Bank could be forced to push rates back up above 4%”, expecting rates to increase by about 0.8 percentage points compared to previous forecasts.
What Has the UK Chancellor Said About the Inflation Impact?
As reported by the Financial Times, UK Chancellor Rachel Reeves has admitted that “the crisis in the Middle East is likely to ‘put upward pressure on inflation’ in the coming months”.
The Guardian reported that Reeves made this statement during the spring forecast, which showed “UK unemployment to peak higher than feared, as tax take heads for a record, but headroom against fiscal rules has increased”.
How Is This Uncertainty Mirroring US Central Bank Concerns?
As documented by Julianne Geiger of Oilprice.com, “the uncertainty mirrors concerns increasingly voiced by U.S. central bankers. Kansas City Fed President Jeffrey Schmid warned last week that the current oil shock may not be as transitory as policymakers once hoped, particularly with inflation already running above target”.
The report highlights that “the comments highlight a growing problem for central banks on both sides of the Atlantic. Policymakers have spent years fighting inflation. Now they are trying to determine whether the latest energy shock is a temporary price spike or the beginning of something more persistent”.
What Are the Key Dates for Remaining 2026 MPC Meetings?
According to the Morningstar report, with six MPC meetings remaining this year, UK rate-setters will meet on the following dates in 2026: Thursday 30 April, Thursday 18 June, Thursday 30 July, Thursday 17 September, Thursday 5 November, and Thursday 17 December.
The Hedgepoint Global report confirms that “the next Bank of England Monetary Policy Committee meeting is on 18 June 2026. Its subsequent meetings are on 30 July 2026 and 17 September”.
What Is the Current Interest Rate Situation in the UK?
As reported by Hedgepoint Global, “interest rates in England are currently 3.75%, following the Bank of England’s February 2026 decision to hold rates”.
The same source notes that “after peaking at 5.25% in 2023 and 2024, interest rates in England have gradually fallen to 3.75% as inflation pressures have eased”.
According to Reuters, “the Bank of England last cut UK interest rates in December 2025 to their lowest level in almost three years, marking the sixth interest rate cut”.
What Additional Economic Impacts Are Expected?
The BBC reports that “energy bills are anticipated to rise when the current price cap is revised in early July”.
The World Bank, according to DAWN.COM, projects “a 24pc increase in energy prices in 2026” with “a 16pc increase in overall commodity prices in 2026, given soaring energy and fertiliser prices and record-high” levels.
Deutsche Bank’s chief UK economist Sanjay Raja, according to CNBC, told Ritika Gupta that “markets now see the next Bank of England rate decision as an almost even split, as rising energy prices complicate the U.K.’s inflation outlook”.
Raja added that higher energy prices “will complicate the bank’s path for one big reason is because it shapes inflation expectations”.