Rabobank’s Stefan Koopman expects the Bank of England (BoE) to keep Bank Rate at 3.75% on 30 July and unchanged through 2026, even as markets still price some chance of further tightening. Softer United Kingdom (UK) inflation, easing wage growth and weak activity data argue against hikes, but higher energy prices and geopolitical risks keep upside inflation pressures and the possibility of a later rate increase alive.

BoE seen on prolonged policy hold

"We expect the Bank of England MPC to leave Bank Rate unchanged at the 30 July meeting. Over the past five months, policy expectations have been outsourced almost entirely to events in the Middle East. The optimism of late May and early June has proved a false dawn, with only a limited trigger needed for Iran-US hostilities to resume."

"That gives the MPC room to hold rates. Bank Rate is already restrictive at 3.75%, the labour market is softening, and inflation expectations remain contained. For Governor Bailey and the centre of the Committee, that should be enough to resist another hike for now."

"We therefore still expect Bank Rate to remain on hold through the rest of the year. The risk is skewed towards a hike if energy prices stay high, but that would come at a cost. Tightening into a soft economy would raise the odds that the Bank has to reverse course next year."

"The key question is whether he stretches his reaction function once more now that energy risks have re-intensified, or whether he gives more weight to inflation persistence. That would increase the odds of a September rate increase."

"We therefore expect monetary policy to respond only if a lasting energy shock starts to feed into wages, prices or expectations. That has not happened yet. But the MPC is running out of cover."

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