A curious calm has descended upon the trading desks of the Square Mile. For weeks, the screens had been a blur of red and green as analysts frantically revised their interest rate models in response to the escalating crisis in the Strait of Hormuz. At one point, the conventional wisdom was that the Bank of England would be forced into a panicked series of hikes, pushing the base rate above four and a half percent to combat a rerun of the 1970s oil shock. But as the diplomatic cables between Washington and Tehran have flickered with the faint hope of de-escalation, the City’s money men have performed a sharp and collective U-turn. The new consensus, whispered over flat whites in the coffee houses of Bishopsgate, is that we might only see one more rate hike this year, and that might be it.
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This dramatic repricing of risk is a testament to the fickle nature of market sentiment. When the world looks like it is about to tip into a wider Middle Eastern war, the price of money goes up. When the world looks like it might just muddle through with a fragile ceasefire, the price of money comes down. It is a logic that is entirely divorced from the reality of life for most British businesses and households, but it governs the cost of their borrowing nonetheless. The futures markets, which just a month ago were pricing in three or even four further quarter-point increases from the Bank of England, have now dialled back those expectations significantly. The new baseline scenario is a single, precautionary hike, perhaps in the summer, followed by a long, flat plateau.
