Bank of England Outlines Economic Scenarios and Forecasts in July Meeting
Summary of Bank of England Economic Scenarios
LONDON, July 30 (Reuters) - The Bank of England left interest rates on hold at 3.75% on Thursday after a split 6-3 vote by its Monetary Policy Committee.
Below is a summary of the economic scenarios it set out. They factor in a high chance of two rate hikes by Q3 2027 as priced by financial markets.
Central Projection
Inflation Forecast
Inflation peaks at 3.2% in the fourth quarter of 2026 then falls below target to 1.7% in Q1 2028 and then rises to 1.9% in Q3 2029.
Economic Growth
The economy grows at an annual rate of 1.1% in Q3 2026 and Q3 2027, then 1.7% in Q3 2028 and 1.6% in Q3 2029.
Energy Prices
Oil Prices
Oil prices follow the market curve and gradually decline from $76 per barrel during Q3 2026 to around $71 at the end of the forecast period.
Natural Gas Prices
Natural gas futures peak at just over 123 pence per therm in the fourth quarter before declining to a little under 60 pence by the end of the forecast horizon.
Inflationary Effects
The energy shock causes moderate second-round inflationary effects.
Milder Scenario
Inflation Forecast
Inflation reaches 2.7% in the fourth quarter of 2026, 2.4% in Q3 2027 and 1.7% in Q3 2028 and Q3 2029.
Economic Growth
Growth is an annual 1.1% in Q3 2026 and Q3 2026, then 1.6% in Q3 2028 and Q3 2029.
Energy Prices
Oil and gas future prices are similar to the period after the U.S.-Iran memorandum of understanding was signed, around 3% and 6% lower than in the central scenario.
Labour Market and Pricing Power
There are no new second-round effects as a looser labour market and weak demand limit workers' bargaining and firms' pricing power.
Adverse Scenario
Inflation Forecast
Inflation reaches 3.1% in Q3 2026, 4.1% in Q3 2027, 2.8% in Q3 2028 and 2.4% in Q3 2029.
Economic Growth
Growth is at 1.1% in Q3 2026, slows to 0.9% in Q3 2027, then rises to 1.6% in Q3 2028 and 1.7% in Q3 2029.
Energy Prices
The oil price is 30% higher on average than the central projection and gas is around 60% higher, but lower than the Bank of England's most severe scenario in April.
Inflation Expectations
Persistently elevated energy prices lead to inflation expectations drifting higher, causing stronger and more persistent second-round effects than in the central scenario.
(Reporting by Yoruk Bahceli; editing by David Milliken)
((david.milliken@thomsonreuters.com))
Keywords: BRITAIN BOE/SCENARIOS