Bank of England interest rate decision

Commenting on the interest rate decision today from the Bank of England, Chris Arcari, Head of Capital Markets, Hymans Robertson said:

“The escalation in the Middle East and its impact on oil and gas supplies have driven a sharp repricing in markets. Having previously expected two 25-basis-point rate cuts in 2026, investors are now entertaining the possibility of rate hikes.

“But while higher energy prices are likely to push inflation back above 3% in the second half of 2026, central banks typically look through supply-side shocks. These tend to be temporary, are largely outside the reach of monetary policy and usually weigh on growth. That said, given the post-2022 experience – when an energy shock led to a prolonged inflation surge – the Bank of England (BoE) will be alert to the risk of second-round effects and a de-anchoring of inflation expectations.

“Today’s conditions differ materially from 2022. Growth is weaker, labour markets are loosening and inflation was already trending lower before the conflict. Interest rates and yields are also significantly higher and mildly restrictive. Nonetheless, recent developments could delay the BoE’s response as it assesses the impact of higher energy prices on both growth and inflation – highlighting the challenging trade-off between downside growth risks and upside inflation risks.

“A shift to rate hikes, as markets are now pricing in, looks unlikely in the near term. The Monetary Policy Committee was inclined to cut rates to support activity before the shock, and tightening policy into a weakening labour market – with unemployment at a four-year high of 5.2% and vacancies falling – risks inflation undershooting after the shock fades. Therefore, any move towards hikes would require clear evidence of second-round effects and further deterioration in inflation expectations.”

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