The Bank of England is expected to conduct multi-scenario stress tests this week to reveal how it might respond to a persistent energy price shock, while refraining from immediate action on interest rates. Markets widely anticipate the Monetary Policy Committee (MPC) will keep borrowing costs at 3.75% on Thursday, awaiting greater clarity on the Middle East conflict. However, as the Iran conflict approaches its third month, committee members may adopt innovative communication strategies to demonstrate how they would handle prolonged market turbulence.

Officials believe that, given the damage to Middle Eastern infrastructure, futures signals indicating a significant easing of energy price pressures may be overly optimistic. While these prices will support the Bank's core forecasts, it may acknowledge the possibility of more negative outcomes, which would have damaging effects on economic growth and inflation. Energy futures prices have declined since their peak in March.

Michael Saunders, a senior adviser at Oxford Economics and former BoE rate-setter, stated: "They are likely to model energy price scenarios, but could also model scenarios with varying degrees of second-round effects for a given energy price path." Due to the "wide range of possible outcomes," these scenarios will "play a central role" in their decision-making.

A prolonged energy shock could further dampen growth and employment, but also increase the risk of an inflation feedback loop—where workers demand higher wage increases to compensate for losses, and squeezed businesses respond by attempting to raise prices. Hawkish members of the BoE are likely to emphasize the latter risk more than their dovish colleagues, especially as recent data shows a pickup in economic activity this month. However, evidence of such effects remains limited so far, as neither employees nor companies possess significant bargaining power during a period of corporate layoffs and fragile demand.

Money markets currently price in two 0.25-percentage-point rate hikes this year, but many economists believe the Bank is more likely to keep policy unchanged. Economists Dan Hanson and Matt Bunny noted: "The Bank of England appears set to hold rates steady in April as it continues to assess the economic impact of the energy shock. It will likely maintain its 'ready to act' guidance, with a minority of policymakers calling for a preemptive rate hike. While these votes may make headlines, we believe the majority will be wary of raising rates amid weak demand. This aligns with our view that rates will ultimately remain stable this year."

Some analysts argue that the disruption caused by weeks of conflict in the Persian Gulf will keep energy prices elevated, even if a peace deal is reached between the US and Iran and the Strait of Hormuz reopens to commercial shipping. Having faced criticism for underestimating the scale and persistence of inflation following the energy shock triggered by the Russia-Ukraine war, the Bank of England has sought to downplay its core inflation forecasts. Recent Monetary Policy Reports have included alternative paths for inflation and interest rates, part of reforms proposed by former Fed Chair Ben Bernanke. Policy rules derived from economic literature are used to illustrate how rates might respond, and some of the nine MPC members have indicated which scenarios they consider most likely.

The Bank will aim to avoid a repeat of the sharp market reaction seen after the March meeting. At that time, after the Bank signaled readiness to act against inflation, investors rushed to bet on more rate hikes, causing the two-year yield to swing by approximately 32 basis points on the day of the decision. Many market participants blamed this volatility on another innovation: the simultaneous publication of individual rate-setters' views alongside the main policy statement.

Bank of England Governor Andrew Bailey attempted to reassure investors who had priced in as many as four rate hikes, insisting he was in no rush to change policy. Businesses anticipate squeezed profit margins due to the Iran conflict.

Thomas Pugh, Chief Economist at RSM UK, commented: "The market reaction last time was quite excessive. I wouldn't be surprised if we see something more temporary and clearer this time to avoid a repeat." Lawrence Mutkin, Head of EMEA Rates Strategy at BMO, suggested that while the central bank may rely on scenario analysis to navigate the high uncertainty around energy prices, a clearer common thread might emerge in the individual statements. "They might feel they need to present a more unified front again," Mutkin said. "You could see more shared wording in the individual statements."