27 March 2026: The MPC Doves have flown the coop

The usually dovish members of the MPC have dropped their calls for lower rates, as the war in Iran is likely to boost inflation. At the same time, the OECD has stated in its quarterly review that the UK is likely to face the worst economic outcome among G20 nations due to rising oil prices.

Although the war in Iran affects all major global economies, the U.K. is expected to suffer the most significant economic impact of any developed market country, according to the Organisation for Economic Co-operation and Development.

In its latest economic report, which revises growth and inflation forecasts from December, the OECD made significant changes to the U.K.’s outlook.

It now forecasts U.K. inflation to reach 4% this year, up 1.5% from its previous estimate, and predicts 2026 growth to stagnate at 0.5%, down 0.5% from its last review.

Meanwhile, the normally dovish Professor Alan Taylor, one of the MPC’s more dovish members, has said that rates will not be able to be cut as expected, commenting that the “Bar for a rate hike” remains high.

The U.K. is more vulnerable to the global energy price shock than many other nations are now. imports most of its oil and natural gas and has limited gas storage facilities. The last inflation print published earlier this week showed the consumer price index unchanged at 3% in February, and is now expected to rise significantly.

Taylor, who had long advocated lower interest rates until the start of the conflict, voted this month to leave them on hold, as did the other eight members of the Monetary Policy Committee, some of whom warned that rate hikes could follow.

"Given massive uncertainty around future energy prices, and our starting point, I currently see a high bar to hiking," Taylor said in the text of a speech due to be delivered at a conference in New York.

Maintaining a steady monetary policy is better until the impact is clearer.

Despite a recent rise in inflation expectations among consumers and an increase in manufacturers' input costs, Taylor stated there was a "low risk" of inflation in Britain becoming unanchored, given the weakening labour market and the smaller scale of the energy shock so far compared to 2022.

Earlier, BoE Deputy Governor Sarah Breeden said she observes less risk of second-round inflation effects now than in 2022, following Russia's full-scale invasion of Ukraine, due to increased labour market weakness.

However, the usually hawkish Sarah Greene, who voted against the last two rate hikes, told reporters she was not tempted to vote for a hike this time.

The lower growth outlook and higher inflation trajectory pose a problem for the Bank of England, which, before the outbreak of the war, had been expected to lower interest rates this spring, from their current level of 3.75%, in what would have been welcome relief for borrowers and businesses.

The Government has announced it would assist those most affected by the rising energy prices. Still, Chancellor Rachel Reeves insisted this week there would be no blanket measures to support households with their energy bills.

With financial markets eyeing the U.K.’s Labour government closely for signs of fiscal indiscipline, Reeves reiterated that her “fiscal rules” limiting government borrowing and lowering national debt were “ironclad” and not about to be bent in response to the Iran war.

Economists believe that Reeves’ rigid adherence to her self-imposed rules will be another factor contributing to a significant slowdown in UK growth in the coming months. One political analyst told reporters that “governing, the UK in particular, is about being flexible and not making plans which cannot be changed to accommodate global crises.”

Sterling fell for the third consecutive trading session as risk aversion continued to drive markets. It fell to a low of 1.3310 and closed at 1.3329. The pound may find some relief today as the market reacts to Trump’s extension of the deadline for the opening of the Strait of Hormuz.

Federal Reserve Vice-Chair Philip Jefferson said on Thursday that he was "somewhat concerned" about vulnerabilities in private credit, which has expanded significantly in recent years but has not yet gone through a full credit cycle to test its resilience.

He told reporters that the current policy stance positions us well, while the labour market is 'roughly in balance' but vulnerable to adverse shocks. He expects the unemployment rate to remain steady through 2026, although risks to the market forecast are skewed downward.

He still believes that tariff policy uncertainty and a surge in energy prices complicate the employment and inflation outlook, at least in the short term.

He had anticipated that disinflationary progress would resume once the tariff effect had completely faded, aided by productivity growth and deregulation. Still, trade policy uncertainty and geopolitical tensions pose upside risks to the inflation forecast. In the near term, overall inflation is expected to rise due to higher energy prices. At the same time, the economy is likely to expand by around 2% or slightly more this year, though with considerable uncertainty.

The increase in energy prices so far should have relatively modest effects on inflation. However, a sustained energy price shock could have significant implications. We will monitor whether higher costs become embedded in the economy.

The U.S. military conflict with Iran is quietly draining the American labour market, with Goldman Sachs estimating that the oil price shock triggered by the war will suppress payroll growth by roughly 10,000 jobs each month until the end of the year. This toll will be felt most acutely in restaurants, hotels, and retail outlets nationwide.

In a research note published yesterday, Goldman outlined a detailed framework for how higher energy prices lead to labour market strain, and the outlook isn’t encouraging.

As the bank outlined earlier this week, its commodities strategists anticipate Brent crude to average $105 in March, spike to $115 in April, and then gradually decline to $80 in the fourth quarter, assuming flows through the Strait of Hormuz remain severely disrupted for about six weeks. In the worst case, if the conflict deepens, Brent could reach $140 a barrel, or even $160 in a “severely adverse” scenario.

The Federal Reserve urged a judge to stand firm in his decision to dismiss two Justice Department subpoenas seeking information about building-renovation cost overruns related to the administration’s legal battle with Chair Jerome Powell.

The Central Bank has requested US District Chief Judge James Boasberg to dismiss a request by US Attorney Jeanine Pirro to reconsider his ruling to quash the grand jury subpoenas.

“The President has been waging a pressure campaign against Chair Powell for years to try to force interest rates lower, and he has been directing prosecutors to target his nemeses throughout his second term,” the Fed said in a filing made public Thursday.

The Fed’s filing argues that the judge should only reconsider if the Justice Department presents new evidence or seeks to correct a “clear error,” which it defines as “it strikes the court as wrong with the force of a five-week-old, unrefrigerated dead fish.”

The dollar index continues to benefit from increased risk aversion, climbing tentatively to a high of 100.01 before closing at 99.94.

The steadiness of its progress may mean it can sustain any rise above the 100 barrier. However, Trump’s lengthening of his ultimatum to Iran may see risk appetite improve marginally, which could mean a lower end to the week for the Greenback.

The risks from the war in Iran, says Christine Lagarde, are being underestimated.

Amid what the International Energy Agency calls the biggest energy shock ever, the president of the European Central Bank warns that expectations of a swift return to normal may be “overly optimistic”.

“We are facing a real shock…probably beyond what we can imagine at the moment.”

With energy risks back on the table, strategists believe that sticky inflation surveys and resilient stocks could prompt the ECB to tighten sooner, even if growth suffers.

Some investors believe another energy-driven price spike could harm economic growth enough to keep the ECB on hold. Policymakers are more focused on the other risk, that higher energy costs might spill over into wages and broader prices.

Lagarde told the “ECB & Its Watchers” conference that the Bank could respond “forcefully” and is prepared to act “at any meeting.” At the same time, the ECB’s Chief Economist emphasised a data-dependent approach that will rely heavily on upcoming surveys of inflation expectations.

Markets are already adjusting: short-dated eurozone yields have increased as traders anticipate a higher likelihood of earlier tightening.

The German Armed Forces Association warns of a growing Russian threat, a weakened Europe, and an unreliable Washington, while the Iran conflict deposits billions into Putin's coffers.

Germany's Armed Forces Association is sounding the alarm: the country must swiftly put its defence industry on a war footing. "The danger already exists now, and it is growing every day," Association President André Wüstner told a German newspaper, warning that Russia could be ready for a confrontation with NATO far sooner than the 2029 timeline experts had previously assumed.

Wüstner urged German defence manufacturers to expand capacity and introduce shift work, describing these steps as necessary to move towards "a kind of war economy" if tensions continue to escalate.

Europe's vulnerability is worsened by Washington's unreliability under Donald Trump, which has left the continent with what he called a "deterrence gap." While such talk may have been dismissed as “typically German” in years past, the fact that German Chancellor Friedrich Merz is investing billions to upgrade Germany’s defence capabilities lends this story weight.

Earlier this year, indicators pointed to a 0.3% upgrade in global GDP projections, but the Middle East conflict has completely offset that boost, the OECD has said. Headline inflation in the G20 has been revised upwards by 1.2 percentage points in 2026 to 4 percent, and by 0.2 of a point next year to 2.7 per cent, compared with the OECD’s December outlook.

Eurozone growth is forecast to be significantly weaker at 0.8 per cent this year, before rising to 1.2 per cent next year.

The markets are well aware of the ECB’s threat to raise rates at the first sign of an increase in inflation, so traders are waiting for more action rather than constant warnings from particularly hawkish members of the Governing Council.

The single currency is being driven almost totally by the dollar, with investors waiting on the sidelines for a date to be released, which will force the Central Bank’s hand. It fell to a low of 1.1519 yesterday and closed at 1.1527.

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