5 March 2026: Borrowing costs surge as Bank of England interest rate cut plans are ‘disrupted’

Any thoughts of an interest rate cut at the MPC meeting due on 19th March are fading, as economists predict that energy prices will remain high for some considerable time.

Britain's fragile economic recovery is under pressure again as global tensions ripple through Westminster and the City. With the next Budget cycle approaching, rising oil prices and downgraded growth forecasts are testing the government's fiscal plans.

Treasury Chancellor Rachel Reeves had hoped her Spring Statement, delivered to MPs earlier this week, would steady nerves and show discipline. Instead, markets have reacted cautiously as investors weigh the economic fallout from the Iran conflict and the risk of inflation picking up again.

Pension funds, households, and businesses are preparing for a period of strain that could influence the tone of the next Budget and decisions at the Bank of England.

The economic picture shifted after new forecasts signalled weaker momentum. According to the OBR, official projections show Britain's growth outlook has been cut, while inflation is expected to remain higher for longer. That complicates Reeves' efforts to balance the books.

The Office for Budget Responsibility lowered its growth forecast, pointing to persistent price pressures and global uncertainty. That leaves the Treasury with less room to manoeuvre at a time when debt interest costs are still high.

Reeves has promised to stick to her fiscal rules, including reducing debt as a share of GDP over time. Slower growth, however, means weaker tax receipts just as spending pressures refuse to ease.

For many households, talk of inflation returning is not abstract. Higher oil and gas prices, linked to instability in the Middle East, will be passed on to fuel and energy bills. If that happens, consumer spending may slow, and that has been one of the main engines of growth in the United Kingdom.

There are already queues forming at petrol stations as motorists face a significant surge in petrol prices.

The Prime Minister is facing pressure from the Gulf and the Cypriot Governments over his perceived lack of urgency in protecting British interests in the region. Cyprus has faced several drone attacks, one of which hit the runway at the RAF’s base at Akrotiri on its southern coast.

The British Cruiser, HMS Dragon, which has been confirmed to sail to the Mediterranean to protect British interests in Cyprus, won’t set sail until next week at the earliest.

UK composite output, which includes manufacturing and services activity, fell slightly in February from 53.9 to 53.7, but remains well above the 50 level which separates expansion and contraction.

The turmoil in energy markets has yet to spill over into foreign exchange, although the dollar has gradually strengthened amid safe-haven flows. Sterling managed its first rally in over a week yesterday, reaching 1.3403 before drifting back to close at 1.3373.

Inflation and other risks from the U.S. military conflict with Iran haven’t changed the need for the U.S. Federal Reserve to keep cutting interest rates this year, with price pressures expected to ease and the job market still at risk, Fed Governor Stephen Miran said on Bloomberg TV yesterday.

Higher oil prices due to the conflict “will feed into headline inflation, but the evidence that it feeds into core inflation is quite limited.

It is difficult for me to get very excited about a policy implication of what’s happened so far,” Miran said, adding that the Fed in his view should make four quarter-point rate cuts this year to reach a roughly neutral level, a point some of his more hawkish colleagues believe has been reached already with the policy rate in a 3.5%-3.75% range.

Whether higher inflation is “core” or “headline” will make little difference to households, who will see their weekly shopping bills increase.

Unlike in 2022, when Russia’s invasion of Ukraine led to a global jump in oil and other commodity prices and helped stoke broader price pressures, Miran said the current situation was different because monetary policy was tight and fiscal policy less expansionary, lowering the risk of persistent inflation.

Meanwhile, he said the Fed should not ignore the “two plus years of a trend of gradually weakening labour markets. There is still evidence to me that it needs support from monetary policy,” including things like the difficulty recent college graduates have had finding a job, Miran said.

The latest jobs report is due for release tomorrow and is predicted to show that 60k new jobs were created in February, less than half the number created in January.

The weekend launch of massive U.S. and Israeli attacks on Iran has added new elements of risk to a Fed policy debate that was already divided. Inflation is currently about 1 percentage point above the Fed’s 2% target and has made little progress over the past year.

Job growth has slowed to a crawl, though policymakers disagree over whether that is a sign of weak demand for labour or, with unemployment relatively low and stable in recent months, a sign that the economy is adapting to tight immigration rules that have limited the supply of available workers, while the effect of AI is not yet fully understood.

For eight years, Federal Reserve Chair Jerome Powell’s rule for dealing with Donald Trump was simple: don’t make eye contact. Then, on a Sunday night in January, he decided to look the President straight in the face.

After receiving subpoenas regarding his months-earlier testimony about the Fed’s building renovations, Powell released a bold video dismissing that explanation. “Those are pretexts,” he said, stone-faced, and accused Trump’s Justice Department of threatening him with an indictment because the Fed hadn’t cut interest rates as fast as the President demanded.

Powell’s gambit had its intended effect, rallying bipartisan and international support to the Fed, which, for now, has preserved its independence. But even those who cheered his defiance aren’t sure the Fed can win a longer war against sustained Presidential pressure. Powell’s term as chair ends in May, and the qualities that made his stand possible don’t automatically transfer to his successor, who, after all, is a Trump appointee.

Trump, meanwhile, has three more years and every motive to keep finding new ways to influence the Central Bank’s decision-making.

The dollar took a breather yesterday following a significant rise since the U.S. and Israel’s combined assault on Iran. The index slipped back to a low of 98.71 and closed at 98.80, with the 100 level remaining elusive.

Unemployment in the eurozone fell to 6.1% in January, Eurostat reported, down from 6.2% in December 2025 and 6.3% a year earlier. Economists had expected the rate to remain unchanged at 6.2%.

The figure translates to 10.77 million people without work across the bloc.

Excluding Bulgaria, the newest member of the currency bloc, the eurozone’s 20 original members also saw an improvement, even though the average jobless rate remained at 6.2%.

As with inflation, which I highlighted earlier this week, the picture concerning jobs and job growth remains mixed. For example, Spain, one of the Union’s shining stars, has an unemployment rate of 10.5%, with Finland coming in next at 10.4%.

European Central Bank Vice President Luis de Guindos said he’s had no sign from Christine Lagarde that she’s planning to step down as President of the Frankfurt-based institution.

The Financial Times reported last week that Lagarde will leave before her term ends late next year, to allow outgoing French President Emmanuel Macron to play a role in choosing her successor. Nonetheless, the ECB said Lagarde is “totally focused on her mission,” though it didn’t say she’d see out her term.

“We’ve seen the reports,” de Guindos told an event in Valencia. “I’ve no indication whatsoever from the President in that regard. The only thing I can tell you is that she’s focused on her work and that, as long as she remains in office, I’m convinced she’ll continue to be an outstanding President. She’s achieved a broad consensus within the ECB’s Governing Council and the Executive Board. She’s done an excellent job”

“When we look at the results today, inflation is practically at target, even slightly below. There was a time when it was above 10%. Europe, despite all the doubts and uncertainty, is growing close to its potential”

However, European Central Bankers are losing their reputation for independence amid a spike in international and domestic economic uncertainty.

Resignation rumours about the heads of the European Central Bank (ECB) and the Banque de France have fuelled accusations of the politicisation of European institutions. It is still believed that, despite De Guindos' assurances to the contrary, ECB President Christine Lagarde plans to resign earlier than her end date in October 2027.

This reflection on the independence of the ECB is not the same as Donald Trump’s constant criticism of Jerome Powell for maintaining monetary policy. This is an attack on the Central Bank’s political independence, with officials manoeuvring to ensure that the lurch to the right, typified by Marine Le Pen's advances in France, does not take hold across the entire region.

The independence of European Central Bankers is currently under scrutiny amid heightened international and domestic economic uncertainty. This questioning of Central Bank independence comes at a critical juncture for the ECB. Geopolitical tensions, such as the Israel–US military strikes on Iran, have driven up oil and gas prices, putting pressure on the euro and raising the potential for an acceleration in core inflation across the Euro Area.

The euro yet again “bounced off” its short-term level of support yesterday, making a low of 1,1574 before rallying to close at 1.1640.

Have a great day!