Bank of England: Wait-and-see stance holds – Societe Generale

Societe Generale economist Sam Cartwright analyzes June United Kingdom (UK) inflation, noting headline Consumer Price Index (CPI) at 2.6% year-on-year, below Bank of England (BoE) projections, with core inflation steady at 2.6%. The report highlights fuel-driven disinflation, limited indirect energy effects, and only modest expected core inflation increases. Cartwright forecasts Bank Rate staying at 3.75% through 2026, with potential 75bp cuts in 2027, while flagging energy-price risks to this path.

BoE seen holding rates through 2026

"Looking ahead, the recent rise in Brent crude, refined oil product, and European wholesale gas prices points to a stronger increase in near-term inflation than we had previously forecast. Using the current Brent and wholesale gas forward curves, headline inflation would peak closer to 3.5% yoy at end-2026, compared with our previous forecast of 3.0% yoy, even after accounting for the government's recently announced VAT [Value Added Tax] cut on consumer electricity prices, which should reduce headline CPI by around 0.1pp. However, given the uncertainty surrounding the US-Iran conflict, it remains unclear whether these trends will prove persistent, intensify, or begin to subside."

"So far, the inflation data point to limited indirect effects from the energy shock beyond its direct contribution to fuel prices, largely because upstream cost pressures take time to pass through supply chains and some energy-intensive upstream commodities had moderate from previous high. While we do expect minor indirect effects from the energy shock, particularly for food and goods inflation, firms' limited pricing power should constrain the extent to which higher input costs are passed on to consumers."

"Our baseline forecast remains that the BoE will keep Bank Rate on hold at 3.75% throughout 2026. By early 2027, we expect the MPC to gain confidence that inflation will return sustainably to the 2% target over the medium term, allowing for cumulative rate cuts of 75bp in 2027, bringing Bank Rate to our estimate of its neutral level of 3%."

"That said, a further escalation of the ongoing conflict, leading to additional increases in energy prices, would pose a risk to this view and could potentially prompt the BoE to deliver two 25bp rate hikes, broadly in line with what markets are currently pricing at prevailing Brent prices. Conversely, a moderation in energy prices, similar to that seen following the signing of the MoU [Memorandum of Understanding], would increase our confidence in our BoE call."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)