THE BANK OF ENGLAND is expected to keep interest rates unchanged this week as it assesses the impact of the Iran war on the UK economy. Investors will also look for any signs that the central bank is moving towards raising rates.
The BoE kept borrowing costs on hold in March as it waited to assess the impact of the conflict on inflation and growth. With uncertainty still high, another no-change decision is expected on Thursday.
Investors, however, expect rate hikes later this year. On Friday, they fully priced in a quarter-point increase in July, another in September and a small chance of a third by year-end, despite Governor Andrew Bailey warning that such moves would be premature.
Those expectations could strengthen if some Monetary Policy Committee members decide that the risks of another period of high inflation — after it rose above 11 per cent in 2022 — justify a rate increase now.
Economists polled by Reuters last week mostly expected an 8-1 vote by the MPC to keep Bank Rate at 3.75 per cent this week, following March’s 9-0 vote. Unlike financial markets, they mostly do not expect rate hikes this year.
Some analysts said as many as three policymakers might support raising Bank Rate to 4.0 per cent to prevent higher inflation from pushing up wages and company prices.
Investors see UK's economy as exposed to the rise in energy prices caused by the war, given its reliance on natural gas.
Data published last week showed higher input costs for firms, with companies raising their expectations for price increases over the next 12 months at a record pace.
Earlier this month, the International Monetary Fund said British inflation, which has been the highest in the Group of Seven for much of the last four years, would peak at 4 per cent this year.
In a challenge to Bailey’s view that it is too early to assess the inflation impact of the war, BoE Chief Economist Huw Pill said on April 17: "If you're waiting and seeing and you don't see, then you've just waited."
Pill and other MPC members concerned about inflation before the war are likely to focus on a rise in service price growth in March, along with signs of strong price pressures for companies.
Other members may point to risks of weaker hiring and lower confidence among consumers and businesses.
With uncertainty over how long the war will last and how higher energy prices will affect broader inflation, the MPC may repeat its March message that it stands "ready to act."
Thomas Pugh, chief UK economist at accountancy firm RSM International, said a stronger tone from the BoE on Thursday would not necessarily mean immediate rate increases.
"The economic data is likely to take a downturn over the next few months, which could shift the emphasis back to concerns about the economy before the next meeting," Pugh said.
The BoE is also due to publish its first full update of economic forecasts since the war began, which is expected to show higher inflation and weaker growth in 2026 and 2027.
Edward Allenby, senior UK economist at Oxford Economics, said more importance should be placed on how MPC members assess different scenarios and rate paths.
"Our baseline forecast assumes Bank Rate will remain on hold for the rest of the year," Allenby said in a note to clients. "The committee will have more information about how the energy shock is feeding through to the economy by the end-July meeting," he added.
Bailey and other MPC members are scheduled to hold a press conference at 1130 GMT, half an hour after the rate decision is announced.
(With inputs from agencies)
