Bank of England to hold rates for remainder of year despite inflation risks: Reuters poll

The Bank of England has decided to keep interest rates at 3.75% for the remainder of the year, despite rising inflation concerns, according to a Reuters poll of economists. This decision aligns with their stance since the start of the U.S.-Israeli conflict with Iran in late February. The UK economy has shown resilience, with little evidence of higher energy prices spilling over into the broader economy.

This has provided the central bank with the opportunity to remain inactive. However, three out of the nine Monetary Policy Committee members voted for an immediate rate increase to 4.0% during the July meeting, up from two in the previous meeting. Inflation is projected to increase to 2.9% in July from 2.6% in June, exceeding the Bank of England's 2% target.

Nonetheless, the majority of economists, 56 out of 64, predict the Monetary Policy Committee will maintain interest rates unchanged at 3.75% for the entire year, up from 83% last month. Six economists anticipated a rate hike by the next meeting, while two suggested a reduction. The poll was conducted from August 13-18, and no economist projected a rate change at the following Monetary Policy Committee meeting in September.

Financial markets continue to forecast a quarter-point rate increase by the end of the year. HSBC UK economist Elizabeth Martins stated that a significant rebound in energy prices would indeed alter the situation. However, she believes the real catalyst for the Monetary Policy Committee is the second-round effects. Crude oil prices, currently at $91 a barrel, are 25% higher than pre-war levels, as the Strait of Hormuz, a crucial shipping lane for Middle Eastern oil, remains closed.

Recent labor market data revealed weak hiring and modest wage growth, both within the Bank of England's acceptable range. Economists believe this data is consistent with the Bank's assessment of the labor market, which acts as a strong deterrent against second-round effects from the energy shock. Bruna Skarica, chief UK economist at Morgan Stanley, emphasized that the core of the Monetary Policy Committee can continue signaling that the predicted inflation surge from fuel and gas prices is improbable to persist beyond the policy-relevant 18-24-month horizon.

Even though inflation is expected to stay above 2% until late next year, a slight majority of economists foresee at least one Bank Rate cut by mid-2027. The survey also forecasts average economic growth of 1.1% and 1.2% in 2026 and 2027, respectively, before a surge to 1.5% in 2028.