29 April 2026
On hold for now, but the outlook is uncertain
The Bank of England (BoE) meets this week against a backdrop of growing downside risks to growth and upside risks to inflation stemming from the Iran war. Money-market pricing points to the Bank keeping Bank Rate on hold at this meeting – our base case – but delivering two hikes over the summer to counter a fresh wave of energy-driven inflation. These hike expectations sit awkwardly with Governor Andrew Bailey’s recent commentary. He has cautioned against knee-jerk rate increases in response to the Iran shock and has stressed that policymakers must also weigh the impact of their actions on economic activity and employment.
Bailey’s stance aligns with our own analysis published earlier this week ‘The cautious case against BoE rate hikes’. We continue to expect the BoE to hold rates steady through the summer before cutting in late 2026 once price pressures subside. While we cannot entirely rule out hikes, we see them only as a risk scenario that could materialise if inflation were genuinely to spiral out of control, rather than as our central expectation.
Differences between the Iran shock and the Russia shock
Commentators are right to note parallels with the 2022 Russian gas shock, when the BoE tightened policy aggressively to contain escalating inflation. Yet the current situation differs in several important respects. Unlike 2022, the domestic backdrop now features softer aggregate demand, weaker underlying inflation momentum and tighter financial conditions. These factors reduce the risk of a persistent inflation shock, raise the risks to output and employment, and hence ought to alter the BoE’s policy reaction function.
The 2022 shock struck an economy that was already overheating and on the brink of a significant inflationary surge, itself the product of overly loose fiscal and monetary policy during the pandemic and the sluggish post-lockdown recovery in global trade and supply chains. BoE policymakers at the time misjudged the strength of aggregate demand, their own contribution to it, and the capacity of firms and workers to leverage their position in price and wage negotiations. It is worth noting that the Bank was already forecasting inflation to reach 7% YoY in 2022 - some five percentage points above the 2% target. Ultimately, inflation peaked just above 11%. However, the ‘additional’ inflation attributable to the war was, at most, four percentage points—the gap between the pre-war forecast and the peak, not the difference between the peak and the Bank’s 2% target.
Since 2022, nominal GDP growth—the broadest gauge of demand—has halved, while consumer demand has slowed by two-thirds. The current supply shock hits an economy facing tight financial conditions, with spending growth close to, or even below, the pace consistent with 2% inflation, and a cooling labour market. The magnitude of the supply shock also appears more limited. Unlike the period before Russia’s war, the pre-Iran war trend in oil markets was one of falling prices, with gas prices stable. Brent crude currently trades around 15% below its May 2022 high of $123 per barrel, while gas prices are roughly 75% lower than the August 2022 peak of 460 p/therm. The likely result is a modest and short-lived uptick in inflation, with the greater risks now to output and employment from weaker demand, and a much reduced likelihood of a renewed wage-price spiral.
Looking for a signal
When Bailey presents the Monetary Policy Committee’s April decision at tomorrow’s quarterly press conference and outlines the new forecasts, markets will be looking for signals that either validate or push back against the pricing of summer hikes. This could come from three areas:
First, the decision and the vote split. The Bloomberg survey of market economists looks for an 8-1 vote split for holding rates at 3.75%. That would not do much to validate money market bets for a 70% probability the BoE will hike in June, though two or more dissents probably would. A 9-0 vote, as in March, for a hold would be taken as a dovish surprise and likely depress June hike bets. Judging by recent speeches and commentary, BoE Chief Economist Huw Pill and external members Catherine Mann and Megan Greene are the most hawkish policymakers.
Second, any changes to forward guidance. In the April statement the MPC retained broadly neutral language on the risks coming from the Middle East disruptions: “the Committee will continue to monitor closely the situation in the Middle East and its impact on global energy supply and energy prices. It stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term.” Despite this neutrality, markets treated the March meeting as a slightly hawkish pivot and raised hike bets on the back of inflation risks expressed in policymakers’ own policy judgements, which are now provided as part of the minutes. In our view, the forward guidance contained in the minute’s opening statement – which reflects the consensus view – remains the most reliable guide to the overall balance of views on the committee. A clear hawkish tilt in this part of the guidance would represent a strong signal that policymakers are actively contemplating rate increases. Because dissents are common at the BoE, Bailey’s own remarks in the press conference should be read with care: he has in the past been careful to distinguish his personal views from the consensus – where the latter matters more for the possible policy path.
Third, the updated forecasts. Given the extreme uncertainty surrounding the global outlook, the new projections should be treated with caution. Nevertheless, they can still reveal important information about the MPC’s reaction function. The February pre-war forecasts showed inflation returning to the 2% target this year and remaining there through 2028, with growth accelerating from 0.9% in 2026 to 1.5% in 2027 and 1.9% in 2028, while unemployment declined from 5.3% to 5.1%. Those projections were conditioned on Bank Rate falling to 3.3% in 2026 before rising to 3.7% in 2028, with Brent oil around $63 per barrel and gas prices easing from 69 p/therm to 62 p/therm. The Bank’s forecasts are conditioned on 15-day averages of forward and futures prices in the run-up to the quarterly report.
This week’s forecasts will be conditioned on a materially steeper path for Bank Rate and significantly higher energy prices. The Bank is therefore likely to revise up its 2026 projections for inflation and unemployment while lowering its growth forecast. The critical test, however, will come in the 2027 and 2028 inflation numbers. A sizeable undershoot below the 2% target, conditioned on market pricing for rate hikes, would amount to a push-back against such a policy outcome. By contrast, a projection that returns inflation to target – or leaves it slightly above – would validate current market pricing for hikes.
