Bank of England set for March pause but don’t write off further cuts in World Economy News 05/03/2026 UK inflation could peak at 3.5% this year if energy prices stay around current levels into the second quarter. We now expect the next Bank of England cut in April, though March is still a distinct possibility if Middle Eastern tensions rapidly de-escalate. With the jobs market still under pressure, further easing is still more likely than not Inflation could test 3.5% if energy prices stay elevated into Q2 Investors have slashed expectations for a March rate cut from the Bank of England; markets are pricing it with just a 20% probability, down from 80% pre-conflict. We are pushing back our call for the next cut to April, though we wouldn’t rule out a move this month. Remember, those who have voted for rate cuts at recent meetings have done so because the labour market is getting weaker. That hasn’t changed. Still, the Bank of England has shown itself to be particularly sensitive to supply-driven spikes in headline inflation, more so than the Federal Reserve or the European Central Bank. Last summer’s hawkish response to higher food prices made that abundantly clear. Chief Economist Huw Pill has often cited 3.5-4% as a level for headline CPI which, if reached, is statistically much more likely to morph into a longer-lasting bout of price pressure. That threshold could easily be tested if natural gas prices stay at or above 120p/therm – equivalent to 50 EUR/MWh on the Dutch TTF benchmark – into Q2 and if oil prices persistently flirt with 85-90 USD/bbl. Headline inflation would peak at 3.5% in late-summer. And that’s before considering the secondary impact on food and services inflation. A more extreme scenario where oil prices go to 110 USD/bbl and European gas prices rise persistently above 65 EUR/MWh could push headline inflation temporarily close to 5%. We estimate every 10% rise in oil prices adds 0.1ppt to headline inflation. Every 10% rise in gas prices is worth 0.15ppt. Cooler jobs market will limit the impact on wage growth and services inflation But this will take some time to show through fully. Household energy prices are capped by the regulator and only 40% of that cap is directly affected by gas prices. The next update isn’t until July and that’ll be based on average wholesale prices from mid-February to mid-May, focusing on energy contracts for delivery next autumn/winter. That means the more short-lived the energy price spike, the less of an impact it will have on households this summer. Rising energy prices inevitably revive memories of the 2022 shock. But there’s an important difference: the jobs market is much, much weaker now. In early 2022, more than half of firms told the Bank it was “much harder” than usual to recruit. Today that figure is just 10%. Vacancies are substantially lower and unemployment higher, meaning workers have less bargaining power to drive up wage growth and protect their disposable incomes. Something similar is true of corporate pricing power. Food retailers wouldn’t struggle to pass on higher costs, but consumer services probably will. They were a key source of inflation amid the 2022 spike; energy is a key input cost for hospitality and others. Those same industries have been shedding workers through 2025. Further cost pressure from energy bills is more likely to trigger even lower headcounts than higher prices, limiting the impact on services inflation relative to 2022. Much also depends on ho