Bank of England some way off a rate hike despite energy price spike
The desk interprets the Bank of England's position to keep rates on hold, despite rising energy prices, as a signal of a cautious approach to monetary policy. Per the full note from ING, the BoE is unlikely to hike rates at the upcoming meeting on July 30, with expectations of inflation peaking at around 3% later this year, which remains well below their 4% trigger level for significant second-round effects. Although recent energy market surges pose a challenge, they are not considered sufficient to warrant an immediate rate adjustment, likely preserving the current rate environment and keeping traders on alert. With no high-impact events slated on the economic calendar in the next few weeks, the potential for a change in sentiment seems limited at this time.
What the desk is arguing
The desk asserts that the Bank of England will maintain its current interest rate stance, notwithstanding the rise in energy prices. According to ING's analysis, there appears to be a substantial buffer between the current inflation forecast and the threshold that could trigger a rate hike. The BoE's reluctance to adjust policy reflects a broader commitment to a careful, data-driven approach amidst fluctuating energy costs.
Supporting this view, ING points out that inflation is projected to peak at approximately 3%, significantly under the 4% level the BoE considers critical for triggering sustained price pressures. This predictive stance suggests that energy price increases alone are deemed insufficient to alter the monetary policy course in the short term.
Where it sits in our coverage
Our consensus target for GBP/USD stands at 1.075, with a range from 1.04 to 1.12. Specific targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This expectation aligns with jpmorgan, which sees a higher trajectory, whereas bofa presents a more conservative outlook, indicating divergence in the market's interpretation of future rate hikes.
How other firms see it
Analysts are largely aligned with the notion of the BoE maintaining its current rate policy, mirroring ING's cautious stance, with firms such as jpmorgan and other major banks supporting a hold scenario. However, bofa counters this perspective with a more bearish outlook, suggesting tighter monetary conditions could emerge more rapidly than anticipated.
In this context, the GBP/USD currency pair will be critical to watch, especially as discussions around the BoE's decisions evolve. The potential for spillover effects into other markets could also come from fluctuations in the EUR/GBP cross amid changing European Central Bank policies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Bank of England is likely to hold interest rates at 0.50% on July 30, despite rising energy prices.
- 02Projected inflation is expected to peak around 3%, remaining below the critical 4% threshold.
- 03Current energy price movements are not seen as sufficient to prompt a change in rate policy.
- 04Consensus amongst firms indicates a cautious outlook for GBP/USD, with differing targets of 1.10 and 1.04.
Market implications
Watch GBP/USD closely for potential volatility as the market interprets the BoE's stance ahead of the July meeting. A break below 1.04 could indicate a shift in sentiment, while stability above 1.10 suggests confidence in current rate levels.
Risks to this view
A sudden spike in energy prices or macroeconomic data indicating unexpectedly high inflation could shift the BoE's rate outlook, prompting a faster response than currently anticipated. Such a scenario would likely lead to a reevaluation of positions in GBP/USD.
Articles Bank of England some way off a rate hike despite energy price spike Published 08:55 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download 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 James Smith Bank of England Governor Andrew Bailey Higher energy prices won't fully show up in the new forecasts The rise in energy prices poses a fresh dilemma for the Bank of England, but we still don’t think the bar for a rate hike has been met.
We’re expecting another 7-2 vote to keep rates on hold this Thursday. 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.
That doesn’t necessarily mean much; those new forecasts almost certainly won’t fully account for the latest rise in energy costs. The Bank typically uses average oil and gas prices over a three‑week observation window, likely beginning in early July. Compared with the Bank's middle 'scenario B' from April, gas prices were only modestly higher in 2026 and lower thereafter, while oil prices were lower across the curve over that time.
Suffice to say those inflation forecasts would be higher if they were based on energy prices today. They would probably show inflation peaking somewhere between 3.5-4%. How energy prices compare to the BoE's April scenarios Source: Bank of England, Macrobond, ING "> Source: Bank of England, Macrobond, ING The data supports a 'hold' Does that mean we’ll see a hawkish shift this Thursday?
It would surprise nobody if Catherine Mann, a long-time hawk, joined Huw Pill and Megan Greene in voting for a hike this week. It’s also not totally out of the question that Claire Lombardelli, who previously railed against rate cuts before the Iran War, joined her – though this would be a much bigger surprise. 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. The jobs market remains fragile , best characterised by ‘low hire, low fire’.
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