BoE Expected to Hold Rates Amid Inflation Pressures and Oil Price Volatility

The Bank of England is expected to keep interest rates steady on Thursday as it assesses the impact of the Iran war and inflation pressures. Unlike the European Central Bank, which raised rates in June, Governor Andrew Bailey has stated that the BoE's previous signal that interest rate cuts were off the table due to the war will likely keep inflation in check.

Oil prices have been volatile, but natural gas prices have risen since the last forecast. The BoE lowered its peak inflation forecast for this year to 3.25% from a prediction of 3.6%-3.7% in April. Matthew Ryan, head of market strategy at Ebury, said that neither current oil prices nor recent economic data warrant a hasty response.

The majority of economists polled by Reuters expect the BoE's Monetary Policy Committee to vote 7-2 to keep rates on hold at 3.75%. However, rate futures markets point to a quarter-point hike by November and another one by March 2027. The BoE is likely to reduce its forecast for inflation, helped by the downward pressure from the electricity tax cut.

The BoE will also set out its view on the market impact of its bond sales over the past year after research suggested more upward pressure on gilt yields than the BoE had estimated.