The Bank of England might’ve cut rates today. Then came the war.

At the last policy meeting, in February, they were one vote away from another cut and said inflation would likely slip back below target soon. “There should be scope for some further reduction in bank rate this year,” Andrew Bailey said, at the time.

Fast forward six weeks and the world’s a different place. On Thursday, the BoE voted unanimously to keep rates on hold. Note the emphasis. Unanimity isn’t something you see a lot from the BoE. So divided is the MPC that at one point last summer, they needed two votes just to reach a consensus.

It’s thus notable that everyone was on board with Thursday’s hold. Unlike Wednesday’s Fed statement, which contained only a brief reference to the war, the BoE was verbose.

“Conflict in the Middle East has caused a significant increase in global energy and other commodity prices, which will affect households’ fuel and utility prices and have indirect effects via businesses’ costs,” the bank said.

“Prior to this, there had been continued disinflation in domestic prices and wages,” the new statement went on. Now, unfortunately, “CPI inflation will be higher in the near-term as a result of the new shock to the economy.”

The war and the attendant impact on energy costs is particularly vexing for the UK which, you’ll recall, arguably suffered the most during the back-to-back supply shocks in 2020 and 2022.

Around 25% of UK CPI is energy-linked. Sharp moves in oil and gas prices can be highly destabilizing.

The simple figure above’s a reminder: Headline inflation in the UK peaked near 12% in 2022 on a short lag to the surge in crude prices and the existential natural gas crunch in Europe.

Like Jerome Powell and the Fed, policymakers across the pond are compelled to take account of the fact that inflation was elevated for a prolonged period headed into the Mideast conflagration.

As I put it on Wednesday, while covering Powell’s press conference, money’s a confidence game and inflation, as a money-related phenomenon, has a psychological component. When an inflationary mindset becomes entrenched, it’s hard to break the spell.

Although inflation did return to target in both the UK and Europe, those economies’ sensitivity to energy shocks isn’t lost on local consumers. The US, by contrast, is a net energy exporter and besides, The White House has the capacity to stop this madness (or at least deescalate it), whereas the war timeline is entirely out of Europe’s hands.

This is especially important for the BoE, which saw its public approval rating go negative for the first time ever in the 2020s. (It was just barely positive in the most recent poll, released last week.)

“Monetary policy cannot influence global energy prices,” the BoE reminded markets and UK consumers on Thursday. All the bank can do is endeavor to “ensure the economic adjustment to them occurs in a way that achieves the 2% target sustainably.” That’s harder than it sounds, and it doesn’t sound easy.

The statement went on to warn of “increased risk of domestic inflationary pressures through second-round effects in wage and price-setting.” Those risks, the BoE said, “will be greater the longer higher energy prices persist.”

There was a passing nod to the impact of higher energy costs on aggregate demand, but the message was clear: In the near-term anyway, the war skews risks asymmetrically and the BoE anyway operates on a single mandate. Promoting growth and employment are secondary to price stability.

Bailey underscored that latter point. “Whatever happens, our job is to make sure inflation gets back to its 2% target,” he said.

The minutes accompanying the statement were overtly hawkish, and the reference to rates being “reduced further” was dropped. Even Swati Dhingra hinted at a hike in a worst-case energy crunch scenario. When the dovish camp loses Swati Dhingra, there’s no one left in it.

The reaction in UK rates was harrowing. As the figure below shows, two-year yields jumped 34bps to a 14-month high.

That’s a staggering move, and it has the potential to undercut sentiment materially.

Headed into Thursday’s decision, markets had already repriced the expected MPC rate path dramatically. Swaps were very close to pricing a pair of hikes from the BoE just prior to the release of the new statement.

As of this writing, that same pricing now reflects three hikes fully priced. On the eve of the war, traders expected two cuts from the BoE this year. That’s a 125bps swing in less than three weeks.