BOE Set to Hold Rates With Oil Posing New Threat

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(Bloomberg) — The Bank of England is expected to keep interest rates at 4.25% on Thursday and signal it is sticking with its one-cut-every-other-meeting approach as officials try to strike a balance between elevated inflation, higher oil prices and a slowing economy.

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The Monetary Policy Committee lowered rates by a quarter-point in May, in a surprisingly close vote that reflected concerns inflation may not return to the 2% target as quickly as hoped. Since then, inflation has surged to its fastest pace in more than a year and escalating tensions in the Middle East are now complicating matters by driving up oil prices.

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Policymakers are already concerned about second-round effects, of higher prices feeding back into higher wages and keeping inflation elevated for longer. Weighing against that, however, are signs that the labor market and wider economy are buckling under Chancellor of the Exchequer Rachel Reeves’ £26 billion ($35 billion) tax hike on companies and US President Donald Trump’s trade wars. 

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All 43 economists surveyed by Bloomberg think rates will be held today, a position reflected in money markets where traders see a near-zero chance of a cut. The announcement due at 12 noon in London comes a day after the Federal Reserve left US interest rates unchanged, while continuing to pencil in two cuts in 2025 amid a deteriorating outlook for growth, unemployment and inflation.

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Vote Split

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The nine-member MPC was widely divided last month. Chief economist Huw Pill and external member Catherine Mann voted to “skip” the quarterly path of cuts and hold rates instead. At the other end of the spectrum, externals Swati Dhingra and Alan Taylor preferred a half-point cut. Even among the five who backed the quarter-point move, three hesitated, including Governor Andrew Bailey.

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The majority of economists surveyed by Bloomberg see a 7-2 split with Dhingra and Taylor voting for a quarter-point cut. Nomura chief UK economist George Buckley points out, however, that the committee is “encouraged not to group-think, thereby lowering the bar for a surprise.” Weak economic data could justify a third person joining the doves. Dan Hanson of Bloomberg Economics says Sarah Breeden, deputy governor for financial stability, is the most likely candidate.

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Guidance

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The BOE has left its formal guidance unchanged since February, when policymakers told investors to expect “gradual and careful” rate cuts as they delivered the third of four reductions since August. The range of opinions last month, and the conflicting data since, suggests the MPC is likely to hang on to the language until August at least.

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“The bank has every reason to stick with its gradual and cautious approach,” said Dean Turner, chief UK economist at UBS Global Wealth Management. “The data may not be great, but it’s not bad either — certainly not enough to warrant a dramatic change.”

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Morgan Stanley Chief UK Economist Bruna Skarica believes any signalling change could be more subtle than altering the formal guidance. The committee could shift the focus of the minutes to emphasize “the stagnating economy, weak payrolls” and a 6-3 vote split. “The tone of the minutes could be dovish,” Skarica said.