Oil Price Volatility Fuels UK Inflation Risks

The Bank of England's central forecast assumes oil prices will fall from $76 to around $71, but Brent is already trading above $90. This discrepancy highlights the significant upside risks for UK assets and underscores the importance of oil in shaping the BoE's outlook.

Rabobank's research suggests that a severe scenario with oil at $100 would imply inflation at 4% or higher. In this scenario, monetary policy would likely respond only if a lasting energy shock starts to feed into wages, prices, or expectations.

Oil remains the key driver of UK inflation scenarios, and its volatility makes it impossible to forecast with confidence. The BoE's central case assumes oil prices will fall from $76 in the third quarter to around $71 by the end of the forecast period, but today's starting point is much higher at over $90.