- MPC expected to hold rates steady at 3.75%
- Last time two members voted to hike and that could increase to three at July’s meeting
- Fluctuating oil prices are muddying the waters with Brent crude surging back over the psychologically important $100 a barrel once again
Danni Hewson, AJ Bell head of financial analysis, comments on next week’s interest rate decision:
“Sometimes it’s easy to read the room and Bank of England rate setters are hyper aware of the value of being reliable, especially at a time of uncertainty.
“But the fluctuating oil price is making it difficult for investors and rate setters alike to figure out what’s heading down the tracks when it comes to the UK’s inflationary picture.
“June’s unexpectedly large fall in the UK’s headline CPI rate to 2.6% is widely expected to provide MPC members with enough cover to continue their wait and see approach, and looking at market expectations today, only a few investors are pricing in a surprise hike.
“The real test is expected to come at the next meeting and investors will be carefully monitoring the number of committee members who signal they’re ready to act.
“Last time out just two members of the nine strong committee wanted a pre-emptive move to 4% and there could be at least one more MPC member who shifts position next week.
“There’s been much criticism that rate setters acted too slowly during the last rate hiking cycle and allowed the secondary effects of inflation to crawl their way into the fabric of the UK economy.
“Things are decidedly different in 2026, and the fragile state of economic growth and the tight labour market will give those at Threadneedle Street significant pause.
“No one wants to rush into a decision which could plunge the UK into a recession if they don’t have to. The swift fall in oil prices when a ceasefire in the Middle East seemed to be holding suggests a quick end to the current conflict could see the hot spark of inflation doused pretty quickly.
“But some inflation is already baked in. The energy price cap rose at the start of July and even with Andy Burnham’s VAT cut on domestic electricity, October’s cap is similarly set to rise.
“Motorists will have noticed that the price at the pump is already heading back up and there’s real worry that the current heat wave will have impacted this year’s UK harvest, even before you factor in the impact of rising fertiliser costs.
“At the moment markets are pricing in the potential for two possibly three interest rate hikes in the next twelve months. But even the fact that the MPC is keeping that door open impacts borrowing costs, and those tight financial constraints could be enough to keep inflation on simmer without the Bank needing to take a single step.”
