29 April 2026: Analysts don’t expect the Bank of England to raise rates this week

The National Institute of Economic and Social Research (NIESR) has said that even in a best-case scenario, the UK economy would grow at a much slower pace this year and next year because of the Middle East conflict.

With households facing higher energy costs linked to the war in Iran, the Chancellor, Rachel Reeves, has said that “nothing is off the table” as the Government considers options for a targeted, temporary support package.

The NIESR projects Britain’s inflation rate, the highest of any advanced economy for much of the past four years, to return to the Bank of England’s 2 percent target only in 2028.

The economy looks set to grow by just 0.9 percent this year and 1 percent in 2027, sharply below NIESR’s previous growth forecasts made in February of 1.4 percent and 1.3 percent for this year and next.

“The Middle East conflict has laid bare the fact that the UK remains highly exposed to global energy shocks,” David Aikman, NIESR’s director, said. The think tank’s 2026 growth forecast was slightly above the IMF’s latest projections.

The think tank also said it expects wage growth to slow to 3.3 percent in 2027, as the labour market weakens. The unemployment rate is projected to peak at 5.5 percent in the fourth quarter of 2026, slightly above the February forecast.

In an adverse scenario, with the conflict dragging on and oil prices rising further, NIESR warned there was a “high likelihood” of Britain entering a recession in the second half of this year.

It predicted the BoE would raise rates only once this year, in July, increasing benchmark borrowing costs to 4 percent from 3.75 percent.

The Prime Minister managed to “whip” rebel MPs who were considering voting in favour of a Parliamentary motion to refer his conduct over the “Mandelson Affair” to the House Ethics Committee into voting against it. While this will give him a temporary reprieve from scrutiny, he must now prepare for the onslaught expected to follow a poor showing by Labour at next week's local and regional elections.

The prospect of Wales, one of the Party’s strongholds for 100 years, turning Nationalist will be a particularly bitter pill to swallow.

Before yesterday’s Commons vote, Starmer’s former chief aide, Morgan McSweeney, told a Commons Committee that he had erroneously supported the decision to appoint Mandelson as UK Ambassador to Washington; this also served to let Starmer off the hook.

The Bank of England’s Monetary Policy Committee, which will announce its decision on interest rates tomorrow, is expected to vote to keep rates unchanged. While inflation is rising, the nature of the price increases suggests that any positive change in the situation in the Gulf would likely require that any rate cut be reversed sooner rather than later.

The pound fell sharply to a low of 1.3463 yesterday, as an Iranian peace proposal was coolly received in Washington, then recovered later in the day to close at 1.3516.

After eight years at the helm of the Fed, Jerome Powell is presiding over his final meeting as Chairman today and tomorrow. While the path for his successor has been cleared in recent days, what the current Fed Chair will do next remains unclear.

The Department of Justice's dismissal of its investigation into him will break the deadlock in the Senate. The Banking Committee is expected to approve Kevin Warsh's nomination later today, ahead of a full floor vote.

Republicans hold a majority in both Houses of the Senate. Consequently, Kevin Warsh should be confirmed before Jerome Powell's term expires on May 15.

However, a central question remains: will Jerome Powell remain on the Fed Board until the end of his term as a Governor in January 2028, or will he resign when his successor takes office? During his latest press conference, Powell said he would decide based on what he believes "is best for the institution and the public we serve."

Reading the American press, one gathers that the 73-year-old Powell would probably prefer to prune the roses in his garden rather than continue juggling monetary policy matters. If he does stay, it's because he believes the institution's independence is at stake.

Since returning to the White House, Donald Trump has pressured the Fed to cut rates further. He has repeatedly threatened to fire Powell, launched an investigation into Governor Lisa Cook, who was accused of mortgage fraud, and blamed Powell for hundreds of millions of dollars in cost overruns for the renovation of the Fed headquarters.

Meanwhile, ideological divides are slowing the Central Bank’s decision-making and could pose a challenge for the president’s nominee to run the Federal Reserve, Kevin Warsh.

The Fed has long been known for its consensus-oriented culture, setting it apart from other agencies run by bipartisan panels. But a 4-3 split on the Fed board last month over Morgan Stanley’s request for a regulatory exemption could signal fights to come, and it was the first time a regulatory matter had so publicly divided the board along partisan lines.

Those divides have slowed Trump’s agenda, since overhauling Wall Street often requires sign-off from the Fed as well as two other agencies, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

The Fed’s internal gridlock is effectively gumming up the works, according to regulators and lobbyists. Trump has made little secret of his desire to install a working majority on the Fed’s seven-member board, which could help him avoid any future long-term bottleneck.

The Fed’s board plays a key role in Wall Street regulation and in determining the cost of money. Those regulations are important because they shape how freely banks extend credit to businesses and consumers, and the terms on which they do so.

Trump has aggressively pushed to reshape the Fed, pressuring it to cut rates and moving to narrow its independence on regulatory policy. Deregulation is also central to his economic priorities.

At the FOMC meeting, which concludes later today, interest rates are expected to remain unchanged. The news blackout, which begins a week before the meeting, means that members have not provided any up-to-date views on monetary policy. However, with little change in the prospects for lasting peace in the Arabian Gulf, their views are unlikely to have changed.

The dollar index continues to be the bellwether for the prospects of peace following the war in Iran, which is currently subject to a ceasefire, although peace talks also appear to have stalled.

The Index briefly rallied to a high of 98.88 as peace proposals were understood to have been made to Washington by Tehran, but they appear not to have been particularly well received, and the dollar fell back to close at 98.63, still a little stronger on the day.

The German Chancellor is casting around for someone to blame abroad as growth stalls and his popularity nosedives at home.

The Chancellor was elected on a promise to jolt Germany’s enervated economy back to life, but one year on, he and his conservative-led government have failed to do so. As Merz’s dismay grows and his popularity plummets, he is increasingly lashing out at factors beyond his immediate control, from the war in Iran to what his Government considers heavy-handed regulation and waste in Brussels.

This week, the Chancellor chose an unlikely place to vent his frustration: the stage of a high school auditorium in his home region in rural western Germany.

A subdued Merz told students that he considered the U.S. to have been “humiliated” by Iran’s regime, to have lacked a strategy to end the war, and to have left peace talks empty-handed, causing significant economic damage to Germany due to the resulting surge in energy prices.

“It’s costing us a lot of money, a lot of taxpayer money, and it’s costing us a lot of economic strength,” Merz said. “This war against Iran has a direct impact on our economic performance, and for that reason, it must be brought to an end as soon as possible.”

It was Merz’s fiercest attack yet on Donald Trump’s handling of the war with Iran, prompting a rhetorical retort from the U.S. President, who, in a social media post on Tuesday, claimed the Chancellor is “OK” with the regime in Tehran having a nuclear weapon. “He doesn’t know what he’s talking about!” Trump wrote. “No wonder Germany is doing so poorly, both economically and otherwise.”

For Merz, who has sought to maintain friendly relations with Trump, the rebuke likely reflects a clear political calculation. Trump and the war are deeply unpopular in Germany, making them convenient targets.

The same logic underpins Merz’s attacks on Brussels: railing against red tape, from AI rules to public spending, plays particularly well with business leaders at home while shifting blame outward.

Consumers across the eurozone now expect significantly higher inflation, as rising energy prices linked to the war in the Middle East begin to affect household outlooks, according to the latest European Central Bank survey.

The ECB is closely monitoring these expectations as it weighs whether further interest rate increases may be needed if inflationary pressures continue to rise, particularly due to the US-Israeli conflict with Iran and its impact on global energy markets.

The ECB’s Governing Council meeting, which concludes tomorrow, is unlikely to agree on an interest rate increase, as members want to see more evidence of inflation becoming ingrained or of second-stage effects that could lead to a wage/price spiral.

The Central Bank’s monthly survey shows that average expectations for inflation over the next 12 months jumped to 4% in March, compared with 2.5% in February. Expectations for inflation over the next three years also rose, from 2.5% to 3%.

This is well above the ECB’s official inflation target of 2%, making the figures particularly important for policymakers responsible for monetary policy across the 21 countries that use the Euro.

In much the same way as the UK is constantly battling to avoid the bottom of the G7 growth charts, the ECB appears to get little respite from the threat of rising inflation. It is almost refreshing to hear the ECB’s hawks counsel caution amid rising energy prices, rather than rushing headlong into a rate increase that may not suit all Eurozone economies.

The Euro continues to be the makeweight in the dollar index's movements. Yesterday, the single currency ended the day marginally lower at 1.1712, having earlier dipped as the dollar index staged a brief rally.

Have a great day!