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Oil at $120: will this force the Bank of England to raise rates?
Economy
The Bank of England is likely to keep interest rates unchanged at its meeting on July 30, despite rising energy prices, according to a research note from ING Economics published on Monday.
ING expects another 7-2 vote to keep rates unchanged this Thursday. The central bank's updated forecasts are likely to show inflation near 3% in the second half of this year and early next.
This is below the 4% threshold at which the Bank of England previously stated a statistically higher probability of spillovers and protracted inflationary pressure, ING notes.
However, these forecasts do not fully account for the recent rise in energy costs, ING notes.
The bank typically uses average oil and gas prices over a three-week observation period, which likely began in early July. ING estimates that if inflation forecasts were based on current energy prices, they would be higher, with inflation likely peaking in the range of 3.5% to 4%.
ING believes that a further rise in energy prices would be required for the Bank of England to change its stance. If oil rises to $120 per barrel from the current $90, and the Dutch TTF natural gas index rises to approximately €80 per megawatt-hour from €58, inflation would exceed 4%, which would likely trigger a moderate tightening of monetary policy, the note says.
ING notes that such a scenario is entirely feasible if the Strait of Hormuz remains blocked throughout August, but the analysts' baseline forecast assumes rates will remain unchanged until 2026. Analysts say it wouldn't surprise anyone if Catherine Mann, a longtime advocate of tight monetary policy, joins Hugh Peel and Megan Green in voting for a rate hike this week.
ING also doesn't rule out the possibility that Claire Lombardelli, who previously opposed rate cuts before the war with Iran, could support the move, although such a move would be far more surprising.
ING estimates that five committee members, including Governor Andrew Bailey, are significantly less convinced that the economy is as vulnerable to an inflation wave as it was four years ago; the latest data, according to analysts, confirms their position.
The labor market remains fragile, best characterized by a "low hiring, low firing" pattern, ING notes, adding that private sector wage growth is below 3%. ING currently forecasts two rate cuts starting in spring 2027, assuming no significant fiscal stimulus in the autumn budget.