ING’s James Smith expects the Bank of England to keep rates on hold on 30 July and sees a prolonged pause extending through 2026. New forecasts are likely to show UK inflation peaking near 3%, below the 4% level seen as risky. ING argues Oil and natural gas prices would need to rise significantly further to justify a rate hike.

Prolonged hold view from ING

"The Bank of England is poised to keep rates on hold on 30 July despite a rise in energy prices. Expect new forecasts to show inflation peaking around 3% later this year. We think oil and natural gas prices would need to spike a fair bit further for the Bank to hike rates in September."

"The Bank’s updated forecasts are likely to show inflation fairly close to 3% in the second half of this year and into early next. And crucially, that’s well below the 4% threshold that the Bank has previously argued is statistically more likely to trigger second-round effects and a longer-lasting bout of price pressure."

"On that basis, we think energy prices would need to go a fair bit higher to convince more than the four hawks to vote for a hike. Oil prices back to US$120/bbl (from $90 today) – and Dutch TTF natural gas prices up around €80/MWh (from €58) – would take inflation above 4% and would likely trigger some modest tightening."

"Though it’s not difficult to see how that could happen if the Strait of Hormuz stays blocked throughout August, our base case is that the Bank stays on hold through 2026. We currently project two rate cuts from the spring of 2027, though this is contingent on there being no material fiscal stimulus at the Autumn Budget."

"But even then, there still appears to be a fairly clear dividing line between the hawks and doves. Just as we saw in the debate about rate cuts earlier this year, there are five officials, including Governor Andrew Bailey, who appear much less convinced that the economy is as susceptible to the sort of inflation wave we saw four years ago. And crucially, the recent data appears to back them up."

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