BOE Seen on Hold Through 2027 Despite Inflation Spike
By Paul Hannon
The Bank of England is unlikely to raise its key interest rate this year or next, despite a sharp pickup in inflation over the second half of 2026, the National Institute of Economic and Social Research said Wednesday.
The U.K.'s annual rate of inflation has fallen despite the conflict in the Middle East pushing energy prices sharply higher since it began in late February. In June, inflation stood at 2.6%, down from 3% in February.
However, NIESR expects the rate of inflation to rise sharply from July, when a regulated cap on household energy prices was raised by 13%.
The economic research body now forecasts that the inflation rate will peak at 3.8% in February next year, and only fall to the Bank of England's 2% target in 2029. Its forecasts assume that the traffic through the Strait of Hormuz returns to normal by the end of the year.
Nevertheless, it doesn't expect the central bank to raise its key interest rate, having in April forecast one increase in borrowing costs this year to 4% from 3.75%.
"We think the Bank of England is right, on balance, to hold rates--though that judgment is conditional," said David Aikman, NIESR's director. "If energy prices rise further and stay high, the calculus changes, and we would expect the Bank to act."
The BOE's nine-member Monetary Policy Committee meets Tuesday and Wednesday, and is expected to announce Thursday that it has decided to leave the key rate at 3.75%, where it has been since December.
The new forecast for peak inflation is lower than the 4.1% projected in April, but remains higher than many other estimates. In June, the BOE said it expected inflation to be 3.25% in the fourth quarter of this year, while Henry Cook, an economist at MUFG, sees a peak of 3.4% to 3.5%.
NIESR said that if energy prices were to be 50% higher than it expects, the annual rate of inflation could peak as high as 4.8%.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
July 28, 2026 19:15 ET (23:15 GMT)
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