The Bank of England earlier this month put financial markets on notice that interest rate rises are back on the table, but economists are divided on whether the bar for a hike has already been met – or whether the energy shock needs to intensify further before the Monetary Policy Committee acts.
Markets are currently pricing in three rate increases this year, based on current swap rates, where lenders price their fixed deals.
Those expectations are likely to be too aggressive, believes James Smith, economist at ING, cautioning that they may be "distorted by poor liquidity in the swaps market".
His base case is that the MPC holds rates steady throughout 2026, with cuts resuming only in early 2027.
Smith argues that at current oil prices around $100 a barrel UK inflation is on course to peak at between 3.5% and 4% this autumn, around a percentage point above pre-war forecasts but not enough, in his view, to force the MPC's hand.
"That is not a game-changer for a central bank that was otherwise ready to cut rates at the March meeting," he said, pointing to a fragile jobs market and the likelihood that firms will respond to higher energy bills by cutting staff rather than aggressively raising prices.
For a hike to become necessary, Smith said oil prices would need to be sustained at $120 a barrel or above, or European natural gas prices would need to exceed 70 euros per megawatt hour – levels that would push inflation materially above 4%.
Sanjay Raja, chief UK economist at Deutsche Bank, argues that risks of "early and multiple hikes no longer look misplaced."
He sets out four conditions that could tip the MPC toward action as soon as April: a further escalation in energy prices; survey data showing firms are passing costs through to consumers while the economy holds up; a lack of government fiscal support to cushion the blow; and rising inflation expectations feeding into wage settlements.
On the fiscal front, Raja notes that recent comments from Chancellor Rachel Reeves suggest broad-based support for households is not very likely, which "could lower the bar for early rate hikes" as the MPC is left to tackle the inflation shock alone.
Inflation expectations are already flashing warning signs, with the closely-watched Citi/YouGov survey showing one-year expectations jumping to 5.4% in March, levels last seen in 2023.
Both economists agree on one thing: the next few weeks of energy prices and economic data will be crucial.
Smith notes that inflation is still likely to fall sharply to around 2.3% in April as last year's utility bill increases drop out of the annual comparison – a temporary dip that may offer the MPC some breathing space before the true impact of higher energy prices hits household bills in July, when the Ofgem price cap is next reviewed.
Raja will be watching the Bank's Decision Maker Panel survey, due next week, for signs of how businesses are responding to rising costs – and whether that is enough to push the April meeting into live territory.