March 10 (Reuters) – Standard Chartered and Morgan Stanley now expect the Bank of England to cut interest rates in the second quarter, delaying earlier forecasts amid inflation risks from the Middle East conflict.
Oil and gas prices have jumped about 50% and 90% since late February, according to StanChart estimates, raising inflation risks that could force central banks, including the BoE, to alter their easing path.
Markets are now pricing a 98% chance the BoE holds rates this month, according to data compiled by the LSEG.
The British brokerage has pushed its March cut to the second quarter and its forecast of subsequent cuts by a quarter, leaving the terminal rate at 3.25% by the end of 2026.
StanChart warned that prolonged energy price spikes could add up to 1.5 percentage points to eurozone inflation.
Investors see Britain as particularly exposed to an energy price shock, with already stretched public finances likely to face further strain if the government cushions energy costs.
Morgan Stanley dropped its call for a March rate cut and now expects the BoE to ease in April, followed by cuts in November and February 2027, rather than in July and November.
Both Morgan Stanley and StanChart see a lower likelihood of rate hikes this year unless inflation risks rise rapidly.
“We struggle to forecast hikes in the UK in 2026,” Morgan Stanley said.
“If the energy price shock proves more permanent, we think a pivot to hikes would require a clear rise in inflation expectations, whereas rate cuts should not be discounted if recession risks become more pronounced,” Standard Chartered said in a note on Monday.
Morgan Stanley said a 10% drop in oil and gas prices could shave about 20 basis points off UK GDP growth, while oil sustained at around $120 per barrel could cut growth by 70 bps.
The BoE Monetary Policy Committee is scheduled to meet on March 19.
(Reporting by Rashika Singh and Siddarth S in Bengaluru; Editing by Rashmi Aich)
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