RaboResearch highlights Oil as the dominant input for UK monetary policy. The Bank of England’s central forecast assumes Oil prices fall from $76 to around $71, with inflation peaking near 3.2%, but Brent already trades above $90. A severe scenario with Oil at $100 implies inflation at 4% or higher, underscoring upside risks for UK assets.

Energy path shapes BoE outlook

"Oil remains of course the swing factor, but the bar for a September hike still looks high."

"In the central case, based on the oil futures curve in the first half of July, oil prices fall from $76 in the third quarter to around $71 by the end of the forecast period."

"Indeed, in the severe scenario (also in Table 1), oil rises to $100 and stays there, which is closer to today’s starting point than the central forecast."

"The takeaway is clear: the most important input for UK monetary policy right now is oil, and oil is both impossible to forecast with confidence and completely outside the UK’s control."

"We think monetary policy will respond only if a lasting energy shock starts to feed into wages, prices or expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)