Bank of England review: Policy outlook highly dependent on situation in Middle East

The BoE kept Bank rate unchanged at 3.75%, as widely expected.
On the one hand, 3 MPC members now call for a hike. On the other, the BoE now recognises that the risk to inflation is less imminent and has lowered its inflation outlook.
We continue to see the BoE remaining on hold this year and have added a rate cut in 2027Q2 to our base case. This hinges on calmer energy markets, though, and the risk is skewed towards a hike in 2026H2.

Danske Research Team Danske Bank A/S

The Bank of England (BoE) kept Bank Rate unchanged at 3.75% as expected. The decision was taken with a 6-3 vote (against 7-2 in June), with Mann joining the hawkish camp. Not a big surprise given some of her recent remarks. The BoE presented three scenarios in their monetary policy report. The central projection with energy prices conditioned on futures curves and moderate, persistent second round effects now sees CPI inflation at 2.6% one year ahead, which is lower than all three scenarios presented in April.

The lack of evidence of second-round effects on inflation was also highlighted at the press conference. GDP growth is stronger and the unemployment rate is lower, leading the BoE to conclude that the UK economy is in a better position than anticipated in April. The central projection also incorporates two hikes in line with market pricing.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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