12 March 2026: Rate cut calls are “pushed” to the second quarter

Rachel Reeves will have been chastened after the OECD declared the UK was the only G7 nation with inflation above 3%, just as it is expected to get even worse.

The report indicates that consumers in Britain are experiencing a higher cost-of-living squeeze than those in the US, Canada, Germany, Japan, Italy and France.

Inflation in the UK has been the highest among the G7 advanced economies for months.

Until war broke out in the Middle East less than two weeks ago, hopes were high that it was on the way down and would drop to its 2% target in April.

Now, surging oil and gas prices mean it is likely to be higher than feared, driving up petrol prices and eventually household energy bills. Some experts think it could rise to five percent later this year.

A monthly comparison of global inflation figures for January, compiled by the 38-member Organisation for Economic Cooperation and Development (OECD), showed that Britain was already in worse shape than its G7 rivals even before the crisis.

France registered the lowest headline inflation in the group at just 0.3 percent.

And across the OECD, easing energy and food price pressures have led to declines, including in the UK.

But stripping out those volatile factors, so-called ‘core’ inflation remained stubborn and was ‘the main driver of headline inflation across all G7 countries’, the OECD said.

It added: ‘This was especially true in the United Kingdom, which remains the only G7 country with headline inflation above 3%’

The latest official figures show consumer price inflation was 3% in January. For its comparisons, the OECD used a separate measure, CPIH, which was 3.2%. CPIH includes housing costs.

The report comes a week after the Chancellor, in her spring statement, boasted of her efforts to keep inflation ‘low and stable as possible’ and an official forecast that it would come down faster than previously thought.

Nearly 500 mortgage deals for homeowners have been pulled from the market due to the Middle East conflict, the fastest disappearing act since the aftermath of the 2022 mini-budget.

Average mortgage rates have also soared past the 5% mark as lenders scramble to raise rates on both two- and five-year fixes.

The war in Iran and the ensuing turbulence across the region have had a wide-ranging impact on the global economy, with oil prices shooting well past $100 at one point before dropping back to $90.

The Climate Change Committee (CCC) has published a new report to support its 2025 advice on the UK’s most recent Carbon Budget.

The independent, statutory body compared its conclusions on cost and energy security across different scenarios. It found that the total additional cost of a single fossil fuel price spike of 2022 magnitude is likely to be as high as the total net additional cost of fulfilling the pathway to Net Zero for each year up to 2050.

In all scenarios, achieving Net Zero was found to be more cost-effective for the UK economy than continued reliance on fossil fuels, resulting in a net benefit to society.

Net zero has been a divisive political issue in the UK, with both Opposition parties stating they would scrap it if they gained power. However, by then, it might be too late to reverse any commitments.

Traders have almost completely reversed bets that the Bank of England will cut rates at the MPC meeting scheduled for next week. They have pushed back any thoughts of a rate cut until deep into Q2, and only then if the conflict in the Middle East has been concluded.

The Pound Sterling remained steady during the North American session yesterday, despite the Middle East conflict entering its twelfth day of hostilities. Inflation in the US bolstered the Greenback’s prospects, yet GBP/USD traded around 1.3400, virtually unchanged.

Iran has warned it is prepared for a prolonged war of attrition that could "destroy" the world economy, after firing on two commercial ships and threatening vessels passing through the Strait of Hormuz.

As Tehran tightened its grip on the vital sea route for the global fuel trade, the International Energy Agency announced a record release of 400 million barrels of oil from its member reserves in a bid to control prices.

"This is a major action aiming to alleviate the immediate impacts of the disruption in markets," IEA Executive Director Fatih Birol told reporters.

"But to be clear, the most important thing for a return to stable flows of oil and gas is the resumption of transit through the Strait of Hormuz."

Oil prices have surged since February 28, when the United States and Israel attacked Iran, killed its supreme leader and plunged the Middle East into war.

UK maritime experts believe that the U.S.’s ability to protect shipping in the Strait of Hormuz will be severely hampered, since Iran has over 2,000 attack vessels, some as small as jetskis, concealed along its southern coast, disguised as fishing vessels and commercial dhows.

Trump's “boast” that his navy had sunk 16 of Iran's fast attack boats merely scratches the surface of Iran's capability to keep the straits effectively closed.

Trump told reporters at the White House that "very quickly" there would be "great safety" for oil tankers in the strait, through which 20% of global crude oil and liquefied natural gas supplies transit.

With the conflict now in its 12th day, Iran's Revolutionary Guard vowed to target "economic centres and banks" that it deems linked to US and Israeli interests, prompting more international firms to evacuate employees from Dubai.

While President Trump managed to calm markets somewhat this week by saying the U.S. and Israel’s war with Iran is “very complete, pretty much,” those assurances from the Oval Office will likely do little to unwind the hawkish stances of the world’s Central Banks.

Any upward pressure impacting the finances of households and businesses will work against calls for a lower base rate, an argument President Trump and his cabinet have been making for the past year.

But Trump is likely to be disappointed. Even if the war in Iran quickly draws to a close, it will be months before Central Banks feel confident that its inflationary impacts have subsided.

The February inflation data suggest that price pressures were in an OK place ahead of the military action in Iran. But with energy costs on the rise and concerns about supply bottlenecks in the region, we are likely to see a return of 3%+ headline inflation in the coming months.

U.S. February CPI was broadly in line with expectations. Headline prices rose 0.3% month-on-month and 2.5% year-on-year. At the same time, core inflation (excluding food and energy) was only 0.2%/2.4%, suggesting inflation pressures were well-behaved ahead of the military action in Iran.

Used vehicle prices fell 0.4% MoM, new vehicle prices were flat, education and communication prices fell 0.2%, and housing costs rose only 0.2%, which helped to offset larger increases for appliances (+3.1% MoM), apparel (+1.3%), medical care services (+0.6%) and airline fares (+1.3%).

Any escalation of military action in the Middle East fuels haven plays in the financial markets. Yesterday, the dollar index reached a high of 99.30 and closed at 99.26. There appears to be a reticence amongst traders and investors currently to drive the dollar significantly above the 100 level.

The European Central Bank feels it is better equipped to shield the euro zone from inflationary shocks caused by the US and Israeli attacks on Iran than it was during the economic turmoil after the invasion of Ukraine.

ECB President Christine Lagarde stated that the region now has a greater economic resilience to avoid a repeat of the strong price rises seen in 2022 and 2023.

“We are in a different economic situation, in a better situation, and we have a greater capacity to absorb shocks,” he told French TV yesterday. “We will do whatever is necessary to ensure that inflation is under control and that the French and Europeans do not suffer inflationary increases like the ones we saw in 2022 and 2023.”

Recent developments in energy markets have raised concerns that inflation, which had recently stabilised at the ECB’s 2% target, could rise again. The war in Iran and the blockades in the Strait of Hormuz have caused sharp increases in oil prices, fuelling fears that energy cost inflation will trigger a domino effect, pushing up the prices of all other consumer goods.

Financial markets responded swiftly to geopolitical tensions. At first, investors increased expectations that the ECB would hike interest rates this year, even predicting two 0.25% rises in the deposit rate at one stage. However, those expectations softened after Donald Trump suggested earlier this week that the conflict is nearly over, diminishing the perceived need for aggressive monetary tightening.

It is just a matter of time before investors realise that Trump, who prefers to announce policy at press conferences, has no hard evidence to back up his claims.

Financial market volatility can amplify economic shocks, and the European Central Bank will examine various scenarios for growth and inflation at its March 19 policy meeting, ECB Vice President Luis de Guindos said yesterday.

De Guindos said policymakers needed to keep a cool head at the upcoming meeting. Still, they acknowledged that forecasting has become more complicated, and market volatility could amplify the actual impact on the real economy.

"An amplification of the shock effect of an energy shock can occur and may lead to an even more intense impact on economic activity," he told a conference in Madrid.

The ECB must now contemplate various scenarios, as it did when Russia attacked Ukraine four years ago, and accept that uncertainty is high. Forecasting is more difficult, de Guindos said.

Meanwhile, Isabel Schnabel, who always feels more comfortable making dire inflation warnings, told a conference in Frankfurt yesterday that “The post-pandemic spike in ​inflation has left ‌scars on companies and consumers, who now know that ‌prices ​can ⁠rise fast and ⁠settle at a higher level.

These are ⁠certain ⁠scars from this ​high-inflation episode,” she cautioned; however, some of the ​energy supply lost to the Iran ​war ​could come ​back, and monetary ​and ​fiscal policies ​are less ​expansive now than in 2022.

The Euro is approaching a level which has attracted buyers during the current crisis. If buy orders which existed before the conflict began have been exhausted, the single currency could rapidly fall to test its medium-term level at 1.1460. Yesterday it reached a low of 1.1560 and closed at 1.1567.

Have a great day!