BoE Seen Holding Interest Rates as Energy Risks Rise

Rabobank's Stefan Koopman expects the Bank of England (BoE) to keep interest rates at 3.75% on July 30 and remain unchanged through 2026. Despite some chance of further tightening, softer UK inflation, easing wage growth, and weak activity data argue against hikes. However, higher energy prices and geopolitical risks keep upside inflation pressures alive.

The Bank of England's Monetary Policy Committee (MPC) is expected to leave interest rates unchanged at the July 30 meeting. Koopman notes that policy expectations have been influenced by events in the Middle East, which have created uncertainty and volatility. The MPC has room to hold rates due to the restrictive nature of current interest rates, softening labor market, and contained inflation expectations.

Koopman believes that Governor Bailey and the center of the Committee will resist another hike for now. However, there is a risk that rates could be increased if energy prices remain high, which would come at a cost and potentially lead to a reversal in policy next year.