Nomura’s Global Markets Research team reports that UK CPI inflation remained steady at 3.0% year-on-year in February, aligning with both consensus and Bank of England (BoE) forecasts, despite expectations for a slight decrease to 2.9% [1]. Services inflation showed persistent stickiness, although core measures eased somewhat, with the Monetary Policy Committee’s (MPC) services ex volatile/administrative prices slowing to 0.24% month-on-month (seasonally adjusted) in February from 0.51% in January. The three-month moving average for services inflation remains elevated, above the BoE's preferred level, but February's data indicated a positive direction [1].
Nomura highlights that the outbreak of the Iran war is expected to drive up UK inflation from March onwards, as evidenced by weekly pump price data showing higher fuel costs in March [1]. This geopolitical development has prompted Nomura to revise its monetary policy outlook, removing previously forecasted BoE rate cuts and now expecting the Bank to keep rates on hold throughout its forecast horizon [1].
At its March MPC meeting, the BoE acknowledged upwardly revised inflation forecasts, projecting that March inflation would likely be around 0.5 percentage points higher than anticipated during the February forecast round—approximately 3.5% year-on-year, up from 3.0% [1]. Additionally, the BoE's Q2 CPI inflation forecast has been raised to 3.0% from the earlier estimate of 2.1%, and based on energy futures curves, CPI inflation could reach 3.5% by Q3, compared to the previous forecast of 2.0% in the Monetary Policy Report (MPR) [1].
Nomura’s analysis underscores that the February inflation reading has limited impact on monetary policy decisions given the new inflationary pressures stemming from the Iran conflict. The expectation is for inflation to re-accelerate, leading to a more hawkish stance from the BoE and the removal of anticipated rate cuts [1].
CONCLUSION
The Iran conflict has significantly altered the UK inflation outlook, prompting Nomura and the Bank of England to revise forecasts upward and abandon expectations for rate cuts. With inflation projected to rise further in the coming quarters, the BoE is expected to maintain its current policy rate, signaling a high-impact shift for UK monetary policy and markets.