THE Bank of England (BoE) is expected to hold its base rate at 3.75% this week as the US and Iran reached a deal to end the war – as experts say “this allows the BoE to breathe a sigh of relief”.
Last night, US President Donald Trump announced on Truth Social that “The Deal with the Islamic Republic of Iran is now complete”.
In a separate post, he proclaimed: “Let the oil flow!”
The Strait of Hormuz will be reopened and the deal that has been struck will officially be signed in Switzerland on Friday.
The value of the Pound rose 0.3% against the US Dollar to $1.344 amid hopes that the Strait of Hormuz can finally be reopened.
Brent crude oil fell 4.7% to $83 a barrel, much below its peak of $126 back in May.
The FTSE 100 rose by 0.8% to 10,551.84 while the mid-cap FTSE 250 increased by 1.2% to 23,614.99.
This comes ahead of the BoE’s base rate decision on Thursday – experts said this allows the BoE to “breathe a sigh of relief” and avoid having to increase its base rate, and could even result in a decrease in the coming months.
Oil is already down significantly in Asian trading
Riz Malik, Independent Financial Adviser at Southend-on-Sea-based R3 Wealth, said the UK economy will benefit from a deal.
He added: “Oil is already down significantly in Asian trading, and if the decline continues, the market should react positively. All eyes will be on the bond markets as inflationary pressures may be offset by lower energy prices. This allows the Bank of England to breathe a sigh of relief and avoid making any rushed, unpopular decisions.
“We could see some very positive movements in fixed-rate mortgage pricing later this week if the deal holds. Will this be enough to kickstart the UK housing market? Unlikely, only taking a hammer to stamp duty will do that.”
Chris Barry, Director at London-based Thomas Legal, said it was “great news”.
He added: “The full impact of months with limited oil supply will be felt in almost every area of industry and the working person will pay the price.
“Although it’s great news a deal will be signed on Friday, the Bank of England is unlikely to be proactive here and will no doubt hold rates.
“Meanwhile the good news of a more settled and predictable market may prompt buyers and sellers in the UK to make their move.”
The Bank of England is widely expected to hold rates
Martin Rayner, Financial Adviser at Compton Financial Services, said inflation is still not under control in the UK.
He added: “The Bank of England is widely expected to hold rates at 3.75% on Thursday, and on balance that is probably the right call – but for the wrong reasons. The debate has become distorted by headline inflation, driven almost entirely by the Middle East conflict pushing up energy prices.
“Strip that out and look at core inflation, which excludes volatile energy and food costs, and the picture is far less alarming. The UK’s underlying domestic challenges haven’t gone away. Unemployment has climbed to 5%, GDP growth is forecast to be around 0.9% this year – and much of that is being carried by government spending rather than genuine private sector momentum.
“Raising rates into that environment risks choking an already fragile economy. If the Iran conflict de-escalates, energy price inflation will fall away naturally – no monetary policy needed. The Bank should keep its powder dry, hold rates, and wait for the geopolitical picture to clear before making any move it may quickly regret.”
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said the BoE should hold.
He added: “For both economic and political reasons, moving the lever in either direction right now would be a mistake. The BoE should hold firm this Thursday. Markets began the year pricing in a steady glide path of cuts, but escalating geopolitical tensions and resulting energy supply shocks have reversed that calculus. With headline inflation threatened by external pressures, the Monetary Policy Committee’s (MPC) tone has turned hawkish, signalled by a recent 8-1 vote split where the sole dissenter favoured a hike.
“Yet monetary policy cannot fix disrupted shipping lanes or global oil prices; raising rates to fight energy-driven inflation would only choke off fragile domestic growth. Previous rate changes take 12–18 months to filter through the economy, and the Bank needs time to establish the true baseline of domestic demand.”
The Bank’s priority should be stability
Jamie Elvin, Director at London-based Strive Mortgages, said the BoE should not raise rates.
He added: “The Bank of England should hold its nerve. Raising its base rate to fight Middle East-driven energy inflation would be like turning down the thermostat when your house is on fire – it would be a waste of time.
“Higher oil prices caused by geopolitical tensions are not a problem that interest rates can solve. With economic growth still fragile and borrowers only just adjusting to the current rate environment, the Bank’s priority should be stability rather than reacting to external shocks that may prove temporary.”
Ken James, Director at London-based Contractor Mortgage Services, said the positive signs in the market may only be temporary.
He added: “Markets have a habit of reacting first and asking questions later. The prospect of the Strait of Hormuz reopening could push oil prices lower, easing inflation concerns and raising hopes that interest rates, swap rates and mortgage pricing may eventually improve.
“But that only happens if the headlines become reality. For the Bank of England, meeting this Thursday, the danger is acting on optimism that may not last. Temporary falls in energy prices do not solve long-term inflation if the underlying geopolitical risks remain.”
Markets have a habit of reacting first and asking questions later
Graham Nicoll, Financial Planner, Chartered FCSI at NCL Wealth Partners, said the US deal with Iran is not a done deal yet.
He added: “If the deal holds, we are likely to see the price of oil continue to fall, which will have a knock on impact in reducing energy prices, which in time will ease inflation. There is likely to be continued scepticism as there will be questions of whether the deal will actually happen and whether both sides will honour the terms of it.
“For the UK, a deal that sticks, marginally strengthens the case for further Bank of England rate cuts, although this Thursday’s rate decision is unlikely to be driven by a single geopolitical development. Swap rates could reduce, supporting lower fixed rate mortgage deals, which would help current and first time buyers.
“With this being a framework agreement rather than a fully implemented peace settlement, markets are likely to retain some caution until Friday’s signing and beyond.”
Photo by Xan Griffin on Unsplash.
