March 2026 BoE Review: Energy Shock Forces ‘Old Lady’ To Stand Pat

Bank Rate Unchanged

As expected, and as money markets had fully discounted in advance of the decision, the Bank of England’s Monetary Policy Committee stood pat at the conclusion of the March meeting.

As a result, Bank Rate was maintained at 3.75%, where it has stood since December, with the dovish signals provided at the prior confab not leading to a rate reduction this time out, in light of the economic outlook having been turned on its head amid ongoing conflict in the Middle East, and the subsequent energy price shock.

Committee United

Surprisingly, the decision to stand pat on Bank Rate was a unanimous one among MPC members, the first such decision in four and a half years.

Still, there was some notable divergence in views when examining the qualitative comments in the minutes. For instance, Chief Economist Pill noted a “substantial” risk of second-round inflation effects, while external members Greene and Mann also leaned hawkish in their commentary. Meanwhile, external members Taylor and Dhingra continued to tilt broadly in a dovish direction, as Governor Bailey noted a readiness to “act as appropriate” in order to ensure the 2% inflation aim is achieved over the medium-term.

Statement Tweaks

Along with that unanimous decision, the MPC also made some tweaks to the accompanying policy statement, to reflect recent geopolitical events.

Primarily,  the explicit easing bias that was included in the February statement was ditched, in favour of a relatively boilerplate message that policymakers will ‘closely monitor’ the geopolitical backdrop, and that the MPC is ready to ‘act as necessary’ depending on how the economic outlook evolves.

While the next round of economic forecasts is not due until the April confab, the MPC did note an expectation that headline CPI is – based on recent commodity price assumptions – set to rise to 3.0% YoY in February, before rising further to 3.5% YoY in March.

Conclusion

Zooming out, this appears to be an MPC that, at the current juncture, is not prepared to entirely look-through the present energy price shock, apart from in the event of a ‘very short-lived’ conflict, which at this stage sadly seems somewhat unlikely.

Despite an increasing margin of labour market slack having emerged in recent months, it appears that the MPC’s consensus opinion is that a more restrictive stance is warranted to bear down on the risks of second-round inflation effects, not least considering the potential scarring caused by recent experiences of higher inflation stemming from a host of supply shocks.

With that in mind, unless the MPC are comfortable enough with the medium-term inflation outlook at the April meeting, and have obtained sufficient clarity on the geopolitical backdrop to be confident that headline prices will sustainably return to the 2% target, any further easing this year is likely to become an increasingly remote prospect.

That said, the approx. 60bp of tightening that markets presently discount by year-end seems wide of the mark, considering that Bank Rate is already in restrictive territory, and that anaemic economic momentum means the economy overall has relatively little pricing power, considerably lessening the need to increase the degree of policy restriction at the current juncture.

Overall, though, the hawkish tone of the statement implies that the MPC may be on the verge of making a horrific policy mistake. The economy is in a much different place to the last energy shock four years ago, with the labour market considerably more fragile, and the risks of price pressures proving persistent considerably lower. With higher energy prices likely, if prolonged, likely to result in a significant negative demand shock, an overly-tight monetary stance would not only worsen any broader economic slowdown, but also run the risk of undershooting the 2% inflation aim in the medium-run.