From London: As Australians slept on Thursday, the Bank of England's Monetary Policy Committee delivered news that upended months of careful economic forecasting. Held unanimous at 3.75%, the decision to keep interest rates frozen marked the first unanimity on the committee in more than four years. But this was not a decision made in calm deliberation. It was forged in crisis.
Just three weeks ago, before the military conflict between Israel, the US and Iran erupted on 28 February, rate cuts were near certainties. The Bank had watched inflation fall steadily toward its 2% target. Markets had priced in relief. Then shipping through the Strait of Hormuz, which carries roughly one-fifth of global oil and liquefied natural gas supplies, nearly ground to a halt.
The numbers tell a stark story. Brent crude jumped from $72.48 before the war began to $126 at its peak this week. The Bank of England's own staff projections now show that energy prices alone will contribute roughly 0.75 percentage points to inflation in the third quarter. That pushes expectations for UK CPI to as high as 3.5% by mid-year. The committee has signalled it stands ready to raise rates further if the geopolitical situation persists.
For Australians, this frozen decision carries real consequences. Those working in the UK face the grim prospect of flat wages while living costs climb. The pound sterling, traditionally a steady store of value, now trades under the cloud of sustained inflation. Australian investors holding UK assets or savings accounts face something worse: real returns eroding as nominal interest rates stall and price growth accelerates. That 3.75% UK savings rate that looked appealing six months ago now masks the uncomfortable truth that inflation will outpace the return.
What strikes an observer from the European vantage point is how quickly geopolitical shocks have become the dominant constraint on monetary policy. Central bankers built their post-2008 frameworks around managing inflation created by demand pressures and labour market dynamics. They prepared for recessions and asset bubbles. What they did not adequately prepare for was energy supply shocks arising from regional wars. The Bank of England this week essentially admitted it cannot cut rates into a rising inflation environment driven by forces beyond its control.
This is no longer a story about whether rates fall. It is a story about whether energy markets stabilise, whether military conflict remains contained, and whether global commodity prices find some new equilibrium. For Australians following these developments from home or living through them abroad, it signals a year where financial planning built on conventional economic assumptions will prove naive. The old certainties have been disrupted by forces that central banks cannot manage.
The Bank of England's official monetary policy statement and its latest International Energy Agency oil market analysis offer Australians with UK exposure a sobering read about what may unfold over the coming months.