Oil prices jump to new four-year high; Bank of England expected to hold interest rates at noon – business live

More thoughts on the ECB from Felix Feather, an economist at Aberdeen.

Just a month ago, markets were pricing in an 80% chance of the European Central Bank delivering a hike at today's meeting. That chimed with the very hawkish communications key ECB officials were delivering at the time, which often drew parallels between the 2022 energy shock and today's. But in the end, the decision to hold the deposit rate at 2% came as no surprise to either our forecasts, consensus, or market pricing, which priced an 8% change of a hike.

Certainly, the energy shock hasn't unwound as hoped. At time of writing, brent crude prices sit above $116 a barrel.

And many of the waymarks to hiking laid out by ECB chief economist Phillip Lane have been hit. Surveyed household inflation expectations, firm selling price expectations, the PMI output prices subindex, and headline inflation have all moved sharply higher over the past month.

But weak activity data has prompted key ECB officials to soften their rhetoric for fears of impairing the demand side. We see the ECB eventually hiking this year, probably multiple times. But soft demand and tighter financial conditions could help attenuate the passthrough of higher costs to consumer prices.

Here's some analysis from our economics editor Heather Stewart:

The message to the UK's crisis-weary households from the Bank of England is: brace yourself for Trumpflation – and the higher interest rates it may yet take to rein it in.

Reading the Bank's quarterly monetary policy report, it is not difficult to understand the fury Rachel Reeves expressed while in Washington this month at the “folly†of the US president's war on Iran – its economic consequences will hit the UK hard.

As a result of the conflict and the resulting rise in oil and gas prices, the Bank reckons average mortgage repayments are to rise by £80 a month; food price inflation could hit 4.6% by the autumn; and utility bills will jump in July and remain high into the winter.

Overall inflation is now expected to peak above 3.5% by the end of this year: more than a percentage point higher than the Bank's pre-war forecasts. In its worst-case “scenario Câ€, in which oil prices hit $130 a barrel and remain there for a prolonged period – alarmingly plausible given Donald Trump's latest erratic pronouncements – inflation peaks above 6%.

In this higher oil price world, interest rates may have to be raised by more than 1.5 percentage points, to at least 5.25%.

Despite this inflation shock, monetary policymakers have opted not to raise rates yet, with the Bank's hawkish chief economist, Huw Pill, the only dissenter on the nine-member committee. But their reasons are hardly comforting, pointing to the weakness of the UK's battered economy in the face of this latest crisis.

The rate-setters' main concern is not the energy price shock, which they cannot alter; but “second-round effectsâ€, under which firms raise prices and workers negotiate pay rises, to offset higher costs, causing inflation to be embedded in the wider economy.

As for the Bank of England, financial markets are expecting a rate rise by the end of July, and another one by the end of the year.

Ruth Gregory, deputy chief economist at Capital Economics, said:

The Bank of England's further hawkish tilt while leaving interest rates unchanged at 3.75% suggests the chances of near-term rate hikes are rising. If oil prices fall back to about $95 a barrel as in our baseline scenario, our best guess is that rates will remain at 3.75% this year.

But one or two hikes in the coming months are certainly possible, especially if energy prices stay around $115 a barrel, or rise even further.

Max Stainton, senior global macro strategist at Fidelity International, has sent us his thoughts on the ECB.

The ECB took a balanced tone as they monitor the uncertain fallout of the energy price shock, with both a hike and hold debated – but ultimately a wait and see approach was seen as justified. The decision to hold was made against the backdrop of only marginally more information relative to March with the news flow over the next six weeks providing more clarity on how the shock is playing out.

We see the ECB hiking in the near term, to lean against the inflationary impulse of higher energy prices and supply chain disruptions in order to contain potential second round effects and ensure that the ECB clearly commit to reining in inflation.

June will provide a further round of projections and scenarios, leaving them in a better position to act. Inflation expectations and forward-looking wage developments will be closely monitored going forward – with the inflation outlook for this year already likely pointing to a higher path relative to the March forecasts.

We are navigating a highly complex environment, marked by persistent uncertainty and rapidly evolving geopolitical dynamics.

The European Central Bank left interest rates unchanged as expected but discussed a rate hike “at lengthâ€.

The bank, which sets interest rates for the 21 countries that are in the eurozone, signalled mounting concerns over soaring inflation, leading to market epectations of several rate hikes this year, with the first move expected in June.

Inflation jumped to 3% this month, well above the bank's 2% target, and is likely to rise further as the Iran war has pushed oil prices to a four-year high.

ECB president Christine Lagarde said the final decision to hold rates was unanimous but told a press conference that a possible rate hike had been discussed “at length†by policymakers.

“We made an informed decision based on as-yet insufficient information,†she said, adding that the next meeting in June would be the “right time†for a new assessment.

There is such uncertainty that we need to understand and revisit that at our next policy meeting. We are certainly moving away from our baseline

she said, referring to a scenario for an early end to the war and a limited energy shock.

The second quarter is already looking dismal due to the Iran war, and the currency bloc's biggest economy, Germany, could even contract after 0.3% growth in the first quarter.

However, Lagarde said the notion of “stagflation†does not apply at the moment. “That is a term better to be parked in the 1970s,†she said in response to a question.

Thomas Ryan, North America economist at Capital Economics, said US growth was boosted by a 9.3% rebound in federal expenditure, which mostly reversed the large contraction in the previous quarter caused by the record-long government shutdown.

The modest slowdown in consumption growth to 1.6% annualised, from 1.9%, was not as bad as we had feared… The only drag came from January, when unseasonably severe winter weather hit real consumption, though this does not point to a strong rebound this quarter as the dampening effects of high gas prices on discretionary spending will be felt more.

Elsewhere, the standout was the 10% annualised gain in business investment, driven by a 17% surge in equipment spending and a 13% rise in intellectual property products spending. Strength across these two categories mostly reflect the rapid rollout of AI-related infrastructure and models.

Finally, we also learned today that the total PCE deflator surged by 0.66% month on month in March, lifted by higher gasoline prices. The core PCE deflator rose at a cooler but still-above target 0.29% month on month pace, pushing the annual rate up to 3.2%, from 3.0%.

Core inflation is moving in the wrong direction as far as the Fed is concerned, helping to explain why some regional bank presidents want the FOMC to drop its easing bias. We expect the Federal Reseve to remain on hold this year, in line with current money market pricing.

Meanwhile, the US economy grew at a faster rate at the start of the year, fuelled by business and consumer demand.

Gross domestic product increased an annualised 2% in the first quarter, up from 0.5% in the previous three months, according to an initial estimate from the Bureau of Economic Analysis. A prolonged federal government shutdown limited growth in the final months of 2025.

Consumer spending, which accounts for two-thirds of economic activity, increased at a better-than-expected 1.6% rate, driven by demand for services. Business spending on equipment rose 10.4%, the fastest pace in almost three years, underpinned by investment in artificial intelligence technology.

To sum up, Bank of England governor Andrew Bailey said interest rates are not necessarily going up. It will depend on the size and duration of the energy price shock and how that is affecting UK inflation and the rest of the economy.

But, interest rate hikes may well become necessary, given the rate-setting committee's judgment that “higher inflation is unavoidableâ€.

The European Central Bank has kept interest rates unchanged, and noted that “the upside risks to inflation and the downside risks to growth have intensifiedâ€.

Like the Bank of England, it is charged with ensuring inflation is around 2% in the medium term. The ECB said in a statement:

The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment. The implications of the war for medium-term inflation and economic activity will depend on the intensity and duration of the energy price shock and the scale of its indirect and second-round effects. The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.

Asked whether interest rates are definitely going up, the Bank of England governor said the most benign scenario A “is not there for decorationâ€.

I would very much give the message: no, it is not the case that we're giving some sort of slightly clandestine message that interest rates are going to go up, notwithstanding what we've decided today. As I said earlier, today is an active hold in that sense.

Earlier, he said:

It's not a passive wait and see hold. It's a deliberately active hold.

So I can't give you a cast iron assurance that therefore there will be no [interest rate] increase in any scenario or any of those scenarios. But what I can say to you is that there is a good deal of space available to accommodate that.

He said one element in scenario B is more plausible than in scenario A, the energy price profile, because of the damage done to energy infrastructure in Qatar where “it's going to take a while to repair thatâ€.

Andrew Bailey said the Bank did not put probabilities on the three different scenarios because things move around too much.

In all three scenarios, inflation is expected to rise, and unemployment will go up to at least 5.5%.

In the worst-case scenario C, oil prices peak at $130 a barrel and remain at this level for a prolonged period, pushing inflation to a peak of 6.2% in the first three months of 2027. This would prompt the Bank to raise interest rates to 5.25%.

In the more benevolent scenario A, oil peaks at $108 a barrel this year before falling to below $80 at the start of 2027 and to $72 by the end of 2028. In scenario B, oil prices also peak at $108 but remain higher over a longer period.

He summed up the Bank's thinking:

The MPC's decision to hold bank rate today is based on two key judgments. First, the continued weakness in activity and the labor market is likely to lessen the strength of second round effects from higher global energy prices, but these effects are likely to be stronger. The larger and more persistent is the rise in global energy prices.

Second, that uncertainty about the strength of second round effects means that monetary policy needs to balance the costs of leaning too little against these effects, against the costs of responding to much.

The… balance is likely to change depending on how events unfold. The situation remains highly uncertain. We will continue to monitor the situation in the Middle East and how it affects the UK economy and inflation very closely.

This includes the size and duration of the energy price shock and its direct effects on UK inflation. It includes the state of the UK economy, and how higher costs of energy and other inputs to production pass through to consumer prices, and it includes the potential for second round effects of our wage and price setting.

The monetary policy committee has considered three scenarios for possible outcomes for the UK economy and inflation over the next three years, Andrew Bailey said.

The central bank's statement issued at noon set these out:

In Scenario A, energy prices were assumed to follow market futures curves, while in Scenarios B and C, these were higher and more persistent than the futures paths to varying degrees. There were no second-round effects from the latest energy shock in Scenario A. Second-round effects were incorporated in Scenarios B and C, and materially so in Scenario C.

The appropriate monetary policy response would be state-contingent. The scenarios illustrated that a more pronounced overshoot of inflation, as in Scenario C, was likely to warrant a forceful tightening in monetary policy. Given the absence of, or more modest, second-round effects in Scenarios A and B respectively, a less restrictive policy stance would be required than in Scenario C.

During the press conference, the Bank's governor said:

Given the sheer unpredictability and drawing on the evidence from scenario B, there is a good case for holding rates now. But we must recognize that a prolonged spike in energy prices, as in scenario C, could lead to a higher bank rate, while also recognizing that a prompt end to the conflict and a reopening of the strait [of Hormuz] can take us to the more benign scenario, as in scenario A.