Economists predict that the Bank of England will adopt a hawkish tone at its policy meeting this week but will keep interest rates unchanged, as renewed conflict in the Middle East has once again pushed up energy prices.
Since the Monetary Policy Committee's last meeting in June, a US-Iran ceasefire agreement has collapsed, pushing international oil prices back toward $100 per barrel. European natural gas prices have climbed to levels not seen since the early stages of the conflict. Should shipping routes in the Gulf region remain disrupted, energy prices could surge even further.
In the initial months following the outbreak of the conflict, the UK economy performed better than the MPC had anticipated, with GDP growing by 0.7% in the three months to May. There is currently little evidence that this energy shock will generate persistent inflationary pressures. The consumer price inflation rate has fallen below market expectations for three consecutive months, dropping to 2.6% in June. Wage growth, a key source of inflationary pressure, has slowed, and food price increases have also moderated, which often influences the public's perception of inflation.
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Economists suggest that the nine-member MPC will keep rates at 3.75% on Thursday while signaling that it stands ready to tighten monetary policy if energy prices spike further or if a one-off price shock becomes a persistent problem. Rob Wood, chief UK economist at Pantheon Macroeconomics, believes this "hold steady, hawkish rhetoric" strategy has worked well for the Bank of England in recent meetings. He added that investor bets on one or two rate hikes (by the end of 2026) have tightened market financing conditions, effectively "doing the MPC's work for it."
Jack Meaning, an economist at Barclays, said that swing voters on the committee have signaled they are "comfortable with the trajectory of inflation expectations." He also noted that the MPC is likely to maintain a "cautious, non-committal stance" on the remainder of the year's policy path. Some economists believe that if the Gulf situation does not ease, the MPC could use this week's meeting to signal the possibility of a rate hike as early as September.
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In April, rather than issuing a baseline inflation forecast, the Bank of England laid out three scenarios corresponding to different paths for energy prices and domestic price pressures. Bank of England Governor Andrew Bailey has stated that in two of the more moderate scenarios, given that financing conditions have already tightened, rates may not need to rise. Dani Stoilova, an economist at BNP Paribas, said: "Since the conflict began, the Bank of England has tended to be patient... but recent developments may test that patience." She noted that for the UK's inflation outlook, natural gas and electricity prices are more influential than crude oil, and current household gas and electricity prices have already exceeded the assumptions underlying the Bank's moderate scenario.
Economists expect the MPC's internal divisions to persist, with at least two members—Megan Greene and the Bank's chief economist, Huw Pill—voting for a 25-basis-point rate hike to prevent inflation from spiraling out of control. The shift in attitude among the committee's centrist members, such as Deputy Governors Clare Lombardelli and Dave Ramsden, or Bailey himself, would be more indicative of a potential majority forming in favor of rate hikes in the coming months. The overall UK consumer price index is expected to break above 3% from the autumn. The 3% level is often seen as a psychological threshold; once breached, consumers may change their behavior due to expectations of persistently high inflation.
Policymakers also have a deeper concern: inflation has been consistently above target for the past five years, and if the European Central Bank prepares to raise rates in September while the Bank of England holds off, it would appear passive. Sandra Horsfield, an economist at Investec, said: "The longer the conflict continues, the more anxious the MPC will become." She added that if a lasting solution were in sight, the committee could "stay on the sidelines" and avoid a rate hike this year, but "every day that energy supply remains tight makes the decision on whether to raise rates more difficult."
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