While inflation in the UK has come down significantly from its double-digit highs in 2022, the Consumer Price Index still stood at 3.4% in April, above the Bank’s 2% target. Core inflation remains elevated, and wage growth, though slowing, remains above 5%. As it stands, all 60 economists polled by Reuters this month expect the Monetary Policy Committee to leave the Bank Rate unchanged at 4.25% next week, following a quarter-point cut in May—the first since 2023. Most expect another reduction in August and a further cut to 3.75% by year-end. However, market pricing has grown more tentative in recent days, amid concerns that higher energy prices could delay the Bank’s trajectory.
“The path of the market into the August forecast round comes down to the market’s assessment of the risk around alterations to guidance,” said Moyeen Islam, a fixed income strategist at Barclays.
The MPC’s decision in May revealed a deepening rift among its members. The 5-4 vote split three ways, with two members calling for a more aggressive 50-basis point cut, and two—including Chief Economist Huw Pill—preferring to hold rates at 4.5%. That division, along with the geopolitical developments, suggests that next week’s decision may come with more cautious language, even if the outcome itself is a foregone conclusion.
The latest labour market data provided some justification for continued easing. Figures released earlier this week showed the sharpest fall in payrolls in five years and the highest jobless rate since 2021. Yet the renewed volatility in oil markets may complicate the Bank’s balancing act.
“Energy traders will now be watching how much the conflict worsens in the coming days,” Vandana Hari, an energy analyst at Vanda Insights told the BBC. Some market observers, including Capital Economics, warn that if Iran’s oil infrastructure were to be targeted directly, Brent crude could rise to as much as $100 a barrel—a level not seen since the immediate aftermath of Russia’s invasion of Ukraine in 2022.