BoE Holds Rates as Energy Shock Weighs on Inflation Forecast

The Bank of England's Monetary Policy Committee (MPC) made a split decision on interest rates, holding them steady but with three members voting in favor of a 25 basis point hike. The dissenting voices argued that the longer the energy shock lasts, the greater the risk that higher prices feed into wages and domestic inflation. This concern is not limited to the next CPI print, but rather what happens when elevated energy costs meet wage negotiations and inflation expectations.

The majority of MPC members preferred to wait, citing that domestic inflation pressures have not yet shown the same persistence as energy prices. The labor market remains soft, and there is still evidence of slack in the economy, which should help contain second-round effects. This decision leaves the door open for a potential hike later in the year if the energy shock refuses to fade.

The Bank's inflation forecast has been revised upwards due to higher oil, gas, and refined-product prices following the escalation in the Middle East. UK CPI could rise to around 3.75% in the fourth quarter of 2026 and slightly above 4% in the first quarter of 2027.

The Bank's balance sheet decision has also provided some relief for the gilt market, with a pause in active gilt sales for six months and stopping sales of long-dated gilts altogether. The process will now run through 2034, with an average annual reduction of about £46 billion, including maturity.