StanChart and Morgan Stanley Push BoE Rate Cut to Q2

Standard Chartered PLC and Morgan Stanley[symbol:\{ value:\"MS\" \}] have revised their forecasts for the Bank of England, now expecting interest rate cuts to begin in the second quarter of 2026. The shift comes as escalating conflict in the Middle East drives up energy costs, creating new inflationary risks for the United Kingdom.

Estimates from Standard Chartered suggest that oil and gas prices have surged by approximately 50% and 90% respectively since late February. These price spikes may force central banks to alter their easing paths to manage potential volatility. Currently, market data from LSEG indicates a 98% probability that the Bank of England will maintain its current rates during the upcoming Monetary Policy Committee meeting on March 19.

Standard Chartered has pushed its expectation for an initial rate cut from March into the second quarter, forecasting a terminal rate of 3.25% by the end of 2026. The bank warned that a sustained energy price shock could add up to 1.5 percentage points to eurozone inflation. Investors view Britain as particularly exposed to these shocks, as stretched public finances may face further strain if the government cushions energy costs for the public.

Morgan Stanley has also dropped its call for a March reduction, now anticipating that the central bank will begin easing in April, followed by further cuts in November 2026 and February 2027. Both institutions see a lower likelihood of rate hikes this year unless inflation risks accelerate rapidly. Regarding economic growth, Morgan Stanley noted that while a 10% drop in energy prices could reduce GDP growth by 20 basis points, sustained oil prices at $120 per barrel could cut growth by 70 basis points.

We struggle to forecast hikes in the UK in 2026.

If the energy price shock proves more permanent, we think a pivot to hikes would require a clear rise in inflation expectations, whereas rate cuts should not be discounted if recession risks become more pronounced.