The Bank of England is widely expected to leave its base interest rate unchanged at 3.75% at its upcoming meeting, even as renewed Middle East tensions fuel volatility in oil markets.
Rate decision expected to hold
Economists, including those at Oxford Economics and Nomura, predict another seven-to-two vote in favour of holding the current rate at the Monetary Policy Committee's meeting on Thursday July 30, which will also unveil fresh economic forecasts.
The recent easing of inflation provided some relief. The Office for National Statistics reported that UK consumer price index inflation fell to a 15-month low of 2.6% in June, helped by slower food and fuel price rises. The decline offered an early positive signal for new Prime Minister Andy Burnham.
Inflation and oil price concerns
However, inflation is expected to swing back higher, moving further from the Bank's 2% target. The Bank has previously forecast inflation rising to 3.25% later this year as higher energy costs feed into household bills from July.
The end of the ceasefire between US-Israeli and Iranian forces has increased uncertainty. Oil prices surged above $100 per barrel for the first time since May, driven by attacks on Red Sea shipping and threats from US President Donald Trump that could disrupt supply. Prices have been volatile, falling after a fresh pause in attacks but rising again on Wednesday.
Impact on future rate path
Governor Andrew Bailey is likely to address how renewed hostilities have influenced the Bank's inflation outlook and decision-making.
Thomas Pugh, chief economist at RSM UK, said oil prices will 'largely' steer the path of interest rates for the next year. 'If they remain close to 100 dollars per barrel over the summer, a September rate hike would move firmly onto the table, with another in the winter likely,' he said. 'However, if there is another peace deal and prices drop back a little, we think a weakening labour market and deteriorating economic outlook will keep the Bank on hold this year, before cutting three times in 2027.'
The intensifying conflict in the Middle East is also likely to impact the Bank's growth outlook. GDP rebounded in May, rising only 0.1% for the month, and rate-setters may be cautious about hiking amid stagnant growth.
