Bank of England Set to Hold Rates Despite Rising Inflation and Energy Prices
Bank of England's Interest Rate Decision Amid Economic Pressures
By Nushaiba Iqbal
Current Interest Rate Outlook
BENGALURU, Aug 18 - The Bank of England will leave interest rates unchanged at 3.75% for the rest of the year, according to a strong majority of economists polled by Reuters, clinging to a view they've held since the U.S.-Israeli war on Iran began in late February.
The UK economy has remained mostly resilient since then, with little evidence of any spillover from higher energy prices into the broader economy. That has given the central bank room to stay on the sidelines.
Monetary Policy Committee Voting Trends
But three of the nine Monetary Policy Committee members voted for an immediate rate rise to 4.0% at the July meeting, up from two in the previous meeting.
Inflation and Economic Indicators
Inflation Trends and Projections
Inflation likely rose to 2.9% in July from 2.6% in June, further above the BOE's 2% target, according to a separate Reuters poll ahead of official data due on Wednesday. But in its latest set of quarterly forecasts, the BOE expects inflation to rise above 3% later this year.
Economists' Expectations for Rate Changes
Still, nearly 90% of economists polled by Reuters, 56 of 64, expect the Monetary Policy Committee to leave rates unchanged at 3.75% this year, up from 83% last month. Six expected a hike by then, and another two forecast a cut. The poll was conducted August 13-18.
No economist forecast a rate change at the next MPC meeting in September. Financial markets are still pricing in one quarter-point rate rise by year-end.
Expert Commentary on Energy Prices and Policy
Elizabeth Martins, UK economist at HSBC, said "a big rebound in energy prices would certainly change things. But the real game changer for the MPC, I think, is around second-round effects."
Crude oil prices, trading at about $91 a barrel, are still about 25% above pre-war levels as the Strait of Hormuz, a key shipping route for Middle Eastern oil, is still closed.
Labour Market and Second-Round Effects
The most recent set of labour market data showed weak hiring and pay growth within the MPC's tolerance range, which economists said is likely to keep policymakers on the sidelines for now.
"This data, we think, is in line with the BoE's read of the labour market - loose and as such a firm barrier to second-round effects from the energy shock," noted Bruna Skarica, chief UK economist at Morgan Stanley.
"With that, the core of the MPC can continue to signal that the anticipated inflation overshoot stemming from fuel and gas prices is unlikely to extend beyond the policy-relevant (18-24-month) horizon," she wrote.
Future Outlook for Rates and Economic Growth
Forecasts for Rate Cuts
Even though inflation is forecast to remain above 2% until late next year, a narrow majority of economists expect at least one cut in Bank Rate by the middle of 2027.
Economic Growth Projections
Economic growth will average 1.1% and 1.2% in 2026 and 2027, respectively, before accelerating to 1.5% in 2028, according to the survey.(Other stories from the Reuters global economic poll)
(Polling by Aman Kumar Soni and Nushaiba Iqbal; Editing by Hari Kishan, Ross Finley, William Maclean)
