Key facts
- Fears of continued oil and gas trade disruption across the Strait of Hormuz could push inflation higher.
- HSBC economist Elizabeth Martins warned the Bank of England would be cautious due to the Middle East conflict.
- Interest rates are widely expected to be held at 3.75 per cent at the next meeting.
- Some economists predict a 25 basis point hike from Huw Pill and Megan Greene.
- Inflation dropped to 2.6 per cent in June, but is predicted to rise above three per cent due to energy price cap resets.
- UBS economist Anna Titareva noted the 'hawkish bias' on the MPC leaves the door open to further rate hikes.
The Bank of England may consider raising interest rates this year as renewed fears of oil and gas trade disruptions in the Strait of Hormuz could drive inflation higher, according to City economists. A significant increase in oil prices, reminiscent of levels seen during the Iran war, has created apprehension on trading floors about potential rate hikes.
HSBC economist Elizabeth Martins indicated that the Bank of England would adopt a more cautious approach to monetary policy due to the resurgence of conflict in the Middle East. Martins suggested that the decision to hold interest rates at 3.75 per cent hinges on the reopening of shipping traffic through the Strait of Hormuz, a vital route for a fifth of global oil and gas supplies, though the normalization of international trade appears increasingly elusive.
While the consensus among economists is that interest rates will remain unchanged at the upcoming meeting, some anticipate that Chief Economist Huw Pill and external member Megan Greene might advocate for a 25 basis point increase. Analysts also suggest that Catherine Mann, who has previously expressed concerns about household and business inflation expectations, could join the more hawkish members of the Monetary Policy Committee in supporting a rate hike.
Official figures released on Wednesday indicated a decrease in inflation for June, falling to 2.6 per cent from 2.8 per cent in the preceding month. However, economists predict that adjustments to the energy price cap starting in July will likely push consumer price index (CPI) inflation above three per cent.
James Smith, an economist at ING, stated that the Bank of England would be more inclined to raise interest rates if CPI inflation climbed to four per cent, which is double its target rate. He noted that even with the recent increases in oil and natural gas prices, inflation is still some distance from that level, forecasting a peak of 3.5 per cent by the end of the year.
Anna Titareva, an economist at UBS, commented that the Monetary Policy Committee's "hawkish bias" and the risk of the Iran war escalating leave "the door open to further rate hikes." She added that the potential for higher inflation to fuel wage growth could be managed given the current weakness in the job market and limited worker bargaining power. Titareva concluded that even if the MPC were to raise rates, the economy's weaker starting point suggests a relatively swift reversal through rate cuts thereafter, viewing rate hikes as a risk scenario rather than the base case.