There are three good reasons to expect the Bank of England’s MPC to “wait and see” for at least another month. Nonetheless, there may be one even better reason to pull the trigger now – “credibility”.
A Reuters poll of sixty-five economists last week found that all sixty-five expect the Bank of England’s Monetary Policy Committee to keep UK interest rates unchanged this Thursday. I am pretty sure they are right. Still, the case for a hike is at least worth considering.
For a start, the global monetary policy cycle has already turned. The fallout from the crisis in the Middle East has added to cost pressures worldwide, with average inflation in the OECD economies hitting 4.4% in April.
The Reserve Bank of Australia (RBA) has now raised rates twice this year. Closer to home, the European Central Bank (ECB) increased rates in the euro area by a quarter point last week. The Bank of Japan has now followed.
The US Fed may stay on hold a little longer while its new Chair, Kevin Warsh, settles in. But the markets also expect any move in US rates this year to be up.
No-one is suggesting that a rate rise would influence the global price of energy. However, central banks still need to be alert to “second-round effects”, where a temporary commodity price shock becomes embedded in inflation expectations and in wage and price setting.
There are still three good reasons for the Bank of England to wait a little longer.
First, monetary policy is already more restrictive here than in most other countries. Ministers like to trumpet the six cuts in UK interest rates since 2024. But the reality is that the Bank of England has not been able to ease as quickly as others, partly because the government has heaped so many extra costs on businesses.
The upshot is that the key official interest rate in the UK (at 3.75%) is still much higher than in the euro area (2.25%), even though inflation rates are now similar.
Moreover, the Bank has persisted with its relatively aggressive sales of government bonds – a policy known as “Quantitative Tightening” – which has added to the upward pressures on long-term interest rates.
The second point is that the risks of “second-round effects” may be lower in the UK. In particular, the labour market is weakening more sharply than in other countries, again partly due to policy choices.
Third, there is an exceptional amount of uncertainty. The US and Iran may finally have a peace deal, but this may not last, while domestic political risks are building.
In the meantime, the latest business and consumer surveys suggest that the economy will stagnate, at best, in the second quarter, and that corporate pricing power remains weak. An unexpected rate hike could just tip the UK into an unnecessary recession.
Here, the MPC’s mandate is crystal clear that “temporary” deviations from the 2% target can be tolerated as long as the costs of returning inflation to target more quickly – in terms of lost output and jobs – would be too great.
Altogether, this would justify a policy of “wait and see” until the next MPC meeting at the end of July. The Committee could then make a more informed decision based on another month or two of new data, as well as the updated forecasts in the July Monetary Policy Report.
Nonetheless, there may be one even better reason to pull the trigger straightaway. In a word, “credibility”.
Inflation has now been back above the MPC’s target of 2% for more than a year and a half. New figures on Wednesday are likely to put the headline rate at around 3% in May.
The April Monetary Policy Reported showed that Bank staff are already expecting inflation to rise further and not to return to target any earlier than the end of 2027, even based on the current market pricing which implied one or two rate hikes by the end of 2026. This is really pushing the boundaries of what could be described as “temporary”.
In the meantime, inflation expectations are creeping higher again, including in the Bank of England’s own Inflation Attitudes Survey. And while the rising costs of commodities have lifted headline inflation everywhere, the underlying measures are relatively strong in the UK.
Andrew Bailey and his colleagues therefore have a chance this week to restore some of the credibility lost during the “mission creep” of the Carney era, and in the wake of Covid, when another “temporary” inflation shock proved far larger and more persistent than expected.
The markets already expect the next move in UK rates to be up, and nearly 40% of respondents in the Reuters economist poll predicted at least one hike by the end of the year. The Bank could get ahead of the curve – raise rates once now and shift to a neutral bias. If presented well, this could lower both expectations of inflation and expectations of how far rates will have to rise in future.
The US-Iran peace deal is not necessarily decisive either way. The falls in commodity prices are obviously welcome, but prices are still higher than before the war, and there is still plenty of inflation pressure in the pipeline.
In the meantime, the reduction in geopolitical risk could mean that demand now recovers more quickly, thus strengthening the case for a rate hike.
Nudging rates up by a quarter point, to 4%, would still leave them at a historically low level. But it would send a clear message – including to the next Prime Minister – that the central bank will not allow inflation to spiral out of control again.
This is an extended version of a piece first published by the Daily Telegraph on 15 June 2026
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