Under Middle Eastern energy shocks, the Bank of England's rate cut expectations are significantly reduced

LootboxPhobia · 2026-03-10T18:22:37+00:00

Deutsche Bank strategists point out that due to changes in Middle Eastern energy conditions, the Bank of England has become the central bank with the largest re-pricing among major central banks. Market expectations for a rate cut by the Bank of England have significantly decreased, reflecting concerns over inflation and energy shocks. Although G10 central banks are generally turning hawkish, the Bank of England's dovish pricing remains substantial. Changes in energy prices and interest rates could influence the short-term movement of the British Pound.

LootboxPhobia

2026-03-10 18:22:37

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Investing.com - Deutsche Bank strategists say that as markets react quickly to the changing Middle Eastern energy situation, the Bank of England has become the main central bank to reprice among this month’s major central banks.

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By the end of February, markets expected the Bank of England to cut rates more than twice by the end of 2026. As of Tuesday morning, the full-year rate cut expectation was only slightly above 10 basis points.

This repricing reflects market concerns that stubborn inflation expectations could prevent the Bank of England from ignoring energy shocks and continuing to cut rates.

At the end of last month, whether measured by absolute value or relative to the spot real interest rate (measured as the policy rate minus the six-month annualized core CPI change), the Bank of England’s pricing appeared relatively dovish compared to its peers.

The reason for this dovish pricing is that markets expect UK inflation to decline in the coming months, ongoing concerns about the labor market, and the Monetary Policy Committee’s stance at the most recent meeting was more dovish than expected—voting 5-4 to hold rates steady.

Since March, fixed income, commodities, and currency markets have experienced high volatility as global markets digest the rapid changes in the Middle Eastern energy situation. Almost all G10 central banks have been repriced to hawkish levels, but the UK has seen the largest shift.

According to Deutsche Bank analysis, based on simple inflation-adjusted real interest rates, the Monetary Policy Committee now faces almost no dovish risk premium relative to its peers.

From a monetary perspective, the impact of trade conditions has been the dominant driver of relative performance. However, the repricing of the UK relative to its peers may be combined with short positions, supporting the pound in the short term.

Strategists note that continued declines in energy prices and reversals in front-end rates could also lead to a reversal of this support.

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