The Bank of England (BoE) is widely expected to maintain its main interest rate at 3.75% this Thursday, a sentiment shared by all 70 economists polled by Reuters. This decision comes despite recent volatility in oil prices, which surged above $100 a barrel last week before falling to $90 on Monday, creating uncertainty about future inflation. The BoE's Monetary Policy Committee (MPC) is closely monitoring wage growth and price increases not directly tied to energy costs, and has previously signalled that rate cuts anticipated for 2026 are now unlikely.
While economists do not foresee a rate hike this week, there's a significant split on the longer-term outlook. Interest rate futures, influenced by last week's oil price jump, had priced in a two-in-three chance of a 25-basis-point BoE rate increase by September and almost three rate hikes by next June. Even after the recent oil price dip, markets are still fully pricing in a rate hike by November. However, a significant majority of economists (58 out of 70) in the Reuters poll predict the Bank Rate will remain at 3.75% through 2026, with only a few forecasting a 25-basis-point lift or reduction.
British inflation, currently at 2.6% in June (a 15-month low), has remained below the BoE's forecasts, partly due to the slower response of regulated household energy prices to wholesale cost changes compared to the US and Eurozone. The European Central Bank, in contrast, is expected to raise rates again in September or October. Forecasts from a Reuters poll indicate that inflation is expected to peak at 3.3% next quarter and will not return to the BoE's 2.0% target until the end of 2027, averaging 3.1% in 2026 and 2.5% in 2027.
In addition to interest rates, the BoE is also adjusting its quantitative tightening (QT) program. Last year, the pace was slowed from £100 billion to £70 billion ($93 billion) per year, with a focus on selling shorter-dated bonds. A June BoE survey suggests markets anticipate a further slowdown in QT to £50 billion. The BoE's Chief Economist, Huw Pill, has expressed concerns that a second oil price shock could lead to higher long-term inflation expectations, while some analysts question whether the BoE will be forced to raise rates if energy prices remain elevated, despite the potential cost of tightening into a soft economy.
