BoE Sees Inflation Risks as Energy Prices Bite

Rabobank's Stefan Koopman notes that despite keeping Bank Rate at 3.75% in a 6-3 vote, the Bank of England sees rising inflation risks from higher energy prices and the Middle East conflict.

The central bank's communication reinforced the view that the balance of risks gets more skewed towards higher inflation if energy prices stay where they are, with second-round effects becoming a pressing policy concern.

Rabobank now expects a 25bp hike to 4.00% at the November meeting, followed by a long hold and eventual cuts in 2027-2028, as the only major central bank not to have tightened policy in response to the latest energy shock.

The MPC would prefer to keep rates on hold for as long as possible but may eventually need to conclude that a rate increase is necessary due to the situation in Iran, which they currently do not expect to de-escalate.