Bank of England Expected to Hold Rates Steady at 3.75% as Falling Energy Prices Reduce Urgency for Hikes
Taylor Wilson
The Bank of England is expected to vote 7–2 on Thursday to hold its benchmark rate at 3.75%, as a Middle East ceasefire drags oil prices lower and sharply reduces the projected inflation peak.
Why is a hold almost certain this time?
The driver is oil: a Middle East ceasefire deal has pushed crude prices sharply lower, bringing the projected inflation peak well below the BoE's earlier 3.6% forecast.
Economists Dan Hanson and Ana Andrade calculate that, marking to the June 16 oil and gas futures curve, inflation over the next year stays near 3% — far below the worst-case scenario of above 6% in early 2027.
This means → the energy shock is fading on its own, giving the BoE room to wait rather than hike.
Who will vote for a hike — and what worries them?
Only two members are expected to vote for a hike: Chief Economist Huw Pill and external member Megan Greene.
Pill voted in April to raise rates to 4%; Greene has repeatedly warned about "second-round effects" — the risk that higher prices feed into wages, which feed back into prices in a self-reinforcing spiral.
Deputy Governor Clare Lombardelli and member Catherine Mann, both seen as potential hawks, are not expected to join them this month. In plain terms = even the hawkish camp cannot muster enough votes; the hike side stays in the minority.
What does Bailey's "active hold" strategy actually mean?
Governor Andrew Bailey describes the current stance as an "active hold" — not hiking, but letting financial conditions tighten on their own.
Since February, mortgage and credit costs have risen by the equivalent of three 25-basis-point hikes, squeezing households and businesses without the MPC touching the policy rate.
This means → the market has done the BoE's tightening work for it — rates stand still, but the real-world impact is already landing.
Why could easing markets create a new problem?
Over the past week, swap rates — the benchmark banks use to set mortgage pricing — have fallen, and the 10-year gilt yield has dropped to a two-month low of 4.75%.
If financial conditions loosen, the "shadow tightening" that substituted for rate hikes loses its bite. This reflects a fragile premise behind the hold decision.
Separately, the UK's July energy price cap is set to rise 13%, pushing headline inflation higher in the short term — though falling petrol prices from cheaper crude may partially offset that.
So is the next move a hike or a cut?
In April the BoE laid out three scenarios; inflation stayed above 3% in all of them, and most MPC members leaned toward Scenario B, which implied higher rates.
But oil prices have now fallen well below the levels assumed in every scenario. Deputy Governor Dave Ramsden has said he would favor an easier path if "some of the downside risks in Scenario A actually materialise." In plain terms = if the energy shock proves short-lived, a cut is more likely than a hike as the next move.
T. Rowe Price economist Tomasz Wieladek argues: "Given the hit to the real economy, the next move is most likely a cut." Traders still price in one 25 bp hike this year, but whether that expectation survives improving inflation data and a softening labour market will be the key watch for the second half.
Content is for reference only, not financial advice.