Bank of England poised for July rate hike on energy spike
The desk anticipates that surging energy prices will compel the Bank of England (BoE) to raise rates in July, particularly in light of projections pointing to substantial increases in oil and natural gas costs. Per the full note from ing-think, a significant spike in these prices will challenge the BoE's current stance, which appears to lean towards maintaining rates amid benign inflation. The latest projections suggest oil could hit $120 per barrel and natural gas could reach €70 per MWh, elevating the Bank’s inflation scenario into a more alarmist 'scenario C' territory, thus pushing the rate hike narrative. This backdrop, combined with upcoming increases in household energy bills slated for July, brings rate hikes firmly back to the forefront of market expectations.
What the desk is arguing
The desk posits that a material escalation in energy prices will force the BoE's hand on interest rates this July. Recent observations suggest that although inflation pressures have softened in the UK, a renewed spike in energy costs could markedly shift the outlook. Per the commentary, an increase to $120 per barrel for oil would indicate a potential departure from the BoE's ‘scenario B’, which aligns with 55 basis points of tightening against a pre-war baseline.
Market participants should note that the current forecast, which includes natural gas climbing towards €70/MWh, underscores a fragile inflation environment. With June now appearing unlikely for a rate adjustment, the July calendar will be pivotal as the BoE reassesses the implications of these rising energy costs on future monetary policy.
Where it sits in our coverage
Consensus forecasts among firms like jpmorgan target a rate near 1.10 for March 2026 while bofa anticipates a lower target of 1.04. Key strategists position BoE rate hikes towards a pivotal inflection point as inflationary pressures resurface, particularly due to energy prices.
Despite varying views, the desk's expectations remain at the upper bound of consensus, suggesting a proactive adjustment to rate policies should energy costs breach anticipated thresholds.
How other firms see it
Firms such as jpmorgan and goldman appear aligned with the desk’s narrative, factoring in potential energy-induced inflationary pressure. In contrast, bofa maintains a more cautious outlook, advocating for less immediate action on interest rates given current economic metrics.
Market viewers should also consider the implications of the EUR/GBP pairing as a close proxy to BoE policy shifts. The relationship between UK energy prices and the broader forex landscape will warrant attention as the situation evolves.
What the calendar says
As there are no imminent high-impact events on the calendar, the focus will hinge on forthcoming data related to energy price movements and potential July inflation readings, setting the stage for a key rate decision ahead.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01BoE likely to raise rates in July due to rising energy costs.
- 02Current scenario 'B' could shift to 'C' with oil at $120/bbl.
- 03Household energy bills rising 13% in July fuel rate hike expectations.
- 04Positioning reflects a reactive market environment to inflation dynamics.
Market implications
Watch for energy price trends in the lead-up to July, with a potential breach of $120 in oil prices acting as a critical test for the BoE's rate policy. Any indications from the central bank before July could aggressively shift market sentiment around the GBP.
Risks to this view
A rapid slowdown in global energy demand or a swift reversal in commodity prices could undermine the inflation narrative, leading the BoE to maintain current rates longer than anticipated. Should natural gas prices retreat sharply, this may also alleviate immediate inflationary pressures.
Articles Bank of England poised for July rate hike on energy spike 10:43 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download A material spike in oil and, crucially, natural gas prices this July would make it harder for the Bank of England to avoid hiking rates. We're pencilling in a one-and-done rate rise this summer James Smith Data over the past month has been a stark reminder that the UK economy is less susceptible to another prolonged bout of inflationary pressure A June rate hike now looks unlikely, but... If we’re right about energy prices, it’s going to become increasingly difficult for the Bank of England to avoid a rate hike this summer.
That said, the case for moving in June has weakened. Natural gas prices have stayed remarkably benign – and that matters, because Britain remains one of the most gas-reliant economies in Europe. Household energy bills are set to rise by 13% in July, but on current pricing they’re likely to fall by around 7% in October.
Back in April, the BoE sketched out three scenarios. Right now, markets look closest to the middle one – 'scenario B' – which most officials felt didn’t necessarily require further tightening. The Bank’s models reckoned this scenario would be roughly consistent with 55bp of tightening versus a pre-war baseline.
And given it had expected to cut rates twice this year, that means simply holding Bank Rate at 3.75% would probably do the trick. But by July, the backdrop could look very different. Our Commodities team sees oil pushing up to $120/bbl, with natural gas climbing towards €70/MWh by the fourth quarter (about 175p/therm on the UK benchmark).
That would take us well away from the Bank’s 'scenario B' and halfway towards the more adverse 'scenario C'. In our new base case, we see headline CPI peaking at 4.3% early next year, as higher gas prices feed through into household energy bills and keep food inflation elevated into the winter. Our forecasts are above the Bank of England's 'scenario B' from April We've calculated the Bank's scenario A & B based on the methodology set out at the April meeting Source: Macrobond, ING "> We've calculated the Bank's scenario A & B based on the methodology set out at the April meeting Source: Macrobond, ING A July hike is likely if energy prices spike If disruption in the Strait of Hormuz hasn’t eased by the July meeting, the Bank will also have to lean more heavily against the tail risks, however unlikely, that the disruptions extend into the autumn.
Policymakers are acutely aware that the longer this lasts, the greater the risk of second-round effects. Against that backdrop, we think the BoE will tilt towards a July hike. It’s not a done deal – and a faster resolution that avoids the renewed spike in oil and gas prices we’re now forecasting would more easily justify a prolonged pause.
Even then, any move is likely to be one-and-done. Data over the past month has been a stark reminder that the UK economy is less susceptible to another prolonged bout of inflationary pressure. The jobs market is weak.
Consumer-facing employment has fallen 2-3% over the past year, and the pace of the decline shows little sign of slowing. Wage growth is dropping sharply and should soon fall below 3% in the private sector. Much of that reflects last year’s tax and minimum wage hikes – a reminder that UK corporates have far less pricing power than they did during the last energy shock.
In short, the case for sustained tightening remains far from clear-cut. And we still think we’re likely to see a return to rate cuts in 2027, something markets aren’t currently pricing. Bank of England rates Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Smith Developed Markets Economist, UK James is a developed market economist, responsible for ING's view on the UK economy and Bank of England. He graduated from the University of Bath with a degree in economics and joined ING in 2015.
In this article A June rate hike now looks unlikely, but... A July hike is likely if energy prices spike
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